Asia Session: The RBA’s Lowe fails to cull rumours of another rate cut in November
Asia’s main commodity currencies, AUD and NZD, were the biggest winners in the FX market on the back of a move by the PBoC to increase liquidity in China’s financial markets and increased confidence amongst Australian business. This allowed AUDUSD to break through the upper band of its recent trading range and NZDUSD to punch through 0.8200.
Lowe picks his words carefully
Later in the session, a Speech from the RBA’s Lowe failed to deter AUD, despite increased speculation of another rate cut. Whilst the speech was far from alarming, it did touch on a few key points that the RBA will likely consider when deciding on the official cash rate next month, most notably; Australia’s soft labour market and deteriorating economic conditions offshore. The deputy governor did, however, express confidence in the ability of the Australian economy to withstand external shocks that may threaten domestic growth. But a lot his faith may stem from the amount of room the RBA has to loosen monetary policy.
Another rate cut from the RBA due in November
As of earlier today, interbank futures pointed towards around a 60% chance that the RBA would cut the official cash rate by 25bps at its November meeting. Swaps put the figure closer to 80%. And, all 4 major banks in Australia now predict the RBA will loosen policy. The point is whatever figures you look at the market would be very disappointed if the RBA didn’t cut the official cash rate by 25 bps in November.
Business confidence data today improved to 0 from a revised -3, largely because of speculation of more rates cuts. One of these cuts was delivered this month, but the market wants more.
The question is not where there is scope for a rate cut, but whether another cut can be justified at this time. Overall, we think it can, but we are not overly optimistic about the effect it will have. Pervious rate cuts haven’t been as successful as the RBA would have liked, despite recent comments from the bank that suggest the last 125bps of cuts acted as a shield to guard the Australian economy from external threats. There is no evidence of this. In fact, domestic data and sentiment is very week. PMI data is abysmally low and recent labour force figures suggest many people have given up looking for work. Adding salt to the wound is the extended economic slowdown in China, which is hitting the support strut of the Australian economy – the mining sector - hard.
However, despite the limited impact that the previous rate cuts appear to have had, the RBA looks ready to cut again. In reality, what else can it do, short of full blow intervention in the FX market to bring down the Australian dollar?
In Japan, its current account surplus shrank to JPY 454.1bn from 625.4bn, which was less than expected slide to 421.1 bn. Japan’s trade balance, however, printed further in deficit territory than estimated – actual -644.5 bn, est. -628.6 bn.
Ones to watch: AUDUSD
The aussie was seemingly unstoppable after breaking thought the top of its recent trading range. The PBoC added fuel to the fire by conducting around 265by yuan of reserve repos in an attempt to add liquidity to China’s financial markets.
However, over the long-term we are still bearish on the pair. It doesn’t appear Spain is applying for a bailout anytime soon, and borrowing cost aren’t forcing Madrid’s hand either, and the PBoC looks to be content to use open market operations to provide liquidity, as opposed to more substantial policy moves aimed at stimulating growth in the near-term (we note that some new infrastructure projects have been announced, but there effects will take time to feed into the real economy. Instead, we are looking for reserve requirement ratio and/or interest rate cuts).
AUDUSD – hourly