Today’s RBA minutes may not be the final nail for those betting on a rate cut in August
The RBA’s latest meeting minutes proved to be more upbeat than investors expected, sending the aussie pushing higher following the release. The bank recognized threats to growth stemming from the European crisis are still very much at the forefront of sentiment, but pointed out that the domestic economy and the Chinese growth story are progressing better than expected, albeit only slightly. Thus, at face value the chance of a rate cut in August has decreased. However, we still think the bank has scope to cut the official cash rate by 25bps at next month’s meeting, especially if inflation is below the RBA’s target range, which we think it will be, as shown in the Q2 inflation report.
We acknowledge it will be a close call. In fact, recent commentary suggests bank officials are moving away from more policy easing in light of a slight uptick in domestic data and improving conditions offshore. Also, the bank may delay a rate move in an attempt to better gauge the impact of recent cuts and, importantly, save its ammunition in case conditions significantly deteriorate down the track.
Nonetheless, we are anticipating a slow depreciation in domestic data, in particular in regards to employment and retail sales. When this is combined with the anticipated weak inflation print, which has in the past caused the RBA to cut the OCR, and tight conditions in the money market it may provide the bank with all the reason it needs to cut rates. Hence, we are still leaning towards a rate cut in early August, although we wouldn’t be entirely surprised if the bank chooses to wait.
Before the RBA minutes were released, a bout of EUR repatriation and/or positioning ahead of Bernanke’s testimonial sent most risk currencies higher against the dollar. In fact, EURUSD punched through 1.2300 and NZDUSD was sent rocketing through 0.800, before both pairs were retraced lower later in the session. The aussie, however, didn’t retrace significantly as it had the neutral tone of the RBA minutes to help hold it above 1.0300, although it is looking shaky as it struggles with some resistance levels between 1.0300-1.0330.
Early in the session, NZ CPI data was a little lower than market expectations, which caused a small sell-off in the kiwi. The headline CPI figure printed at 0.3% q/q (exp. 0.5%). At the time, NZDUSD was briefly sent below 0.7950, before retracing all of its losses. Also, motor vehicle sales data out of Australia printed at -0.6% m/m (prior +2.4%).
Attention will now shift to Europe for German economic sentiment data, a speech by BoE Governor King and the BoE’s inflation letter, before turning to the US for CPI data and, most importantly, Fed Chairman Bernanke’s testimonial to congress, which investors will be scrutinising for any indications of more possible QE. The latter may cause some choppy price action but, overall, we expect the Chairman to kick the QE can to the September meeting.