RBA’s Lowe caps Aussie’s election rally

RBA’s Lowe says June rate cut under consideration

Coming on the back of the election victory by the Conservative coalition which promised tax cuts which could eventually flow through to the local economy, some were expecting RBA’s Lowe to tone down the need for further rate cuts in his speech in Brisbane today. That wasn’t the case, as he commented that the recent data makes it less likely that the labour market would surprise to the upside. While the global situation looks brighter, and he expects growth to strengthen later in the year, the board will consider the case for a rate cut at the June meeting, as slow wages growth and an unemployment above 5% limit inflation pressures.

AUD/USD slipped into the red for the day after his speech, falling to an intraday low of 0.6888 after hitting 0.6929 earlier while AUD/JPY fell from 76.28 to 75.96.

AUD/USD Daily Chart

Source: OANDA fxTrade

Election gains proved to be temporary

AUD/USD rallied 1.0% yesterday after it emerged that the Conservative coalition was victorious in the weekend election. That was the biggest one-day gain in 5-1/2 weeks and snapped a three-day losing streak. The Aussie had been under pressure from a shift in the perceived interest rate outlook at the RBA and the escalating tariff spat between the US and China.

The Aussie was looking to extend those gains today until both the minutes of the RBA meeting on May 7 were released and the RBA Governor spoke. The minutes highlighted discussions about the labour market and how a rate cut might be appropriate IF there was no further improvement in the labour market, given the recent weak Australian inflation data. These themes were continued in Lowe’s speech and the June meeting now becomes a “live” meeting, with rates markets now pricing in a near 70% chance of a 25bps rate cut compared with 57% yesterday.

Waiting for China’s response

The only reaction from China to the US move to blacklist China’s Huawei has so far only been verbal in nature. China’s envoy to the EU labeled the actions as “wrong behavior” which will produce a “necessary response” on Monday while at a regular news briefing in Beijing yesterday, China’s Foreign Ministry spokesman Lu Kang said to “wait and see” for what countermeasures China would adopt.

Equity markets appeared to take a breather from the two-day sell-off and posted moderate gains in Asia this morning. The US indices were up between 0.32% and 0.51%, the Japan225 index gained 0.71% while the Australia200 index rose 0.53% to be within yesterday’s highs, which were the highest since December 2007.

Australia200 Monthly Chart

Source: OANDA fxTrade

All quiet on the European front

The European data calendar is almost bare, with only the UK’s CBI industrial trends survey on tap. The US session features existing home sales for April, which are seen rebounding to +2.6% m/m from March’s disappointing 4.9% decline. Speeches from Fed’s Evans and Rosengren complete the day.