Tag Archives: forex

RBA Will Remain on the Sidelines, AUD Vulnerable

Signs of a slowdown in the Australian economy will force the Reserve Bank to hold rates unchanged on Tuesday and are making expectations of an August hike vulnerable. The Australian dollar is likely to fall if policymakers do not take strong incremental steps toward future rate hikes.

 

At 0430 GMT, all 28 economists surveyed by Bloomberg expect the RBA to leave interest rates at 4.75%. Yesterday’s unexpected drops in retail sales and inflation cemented those expectations and are cutting into the chance of an August hike.

 

May retail sales fell 0.6% compared to the 0.3% rise expected. At the same time, the Melborne Institute/TD Securities monthly inflation gauge was flat in June after a 0.2% rise in May; the annual rate fell to 2.9% from 3.3%. Building approvals also slumped 7.9%.

 

At the previous meeting, on June 6, the market had priced in a 16% chance of a hike. When it didn’t come, AUD/USD fell 60 pips to 1.6080. The pair eventually bottomed at 1.0390 on June 26 but popped back to 1.0775 during last week’s risk rally. What’s critical from a fundamental and technical perspective is that the pair has failed to close above 1.0774 — the high before June’s unexpectedly dovish RBA statement. This will be a key closing level in the day ahead.

 

The market is still hanging on to the idea that the RBA could hike in August but we see it as a long shot. We also expect the chance of a hike in August to fall to virtually nil if the RBA continues to say: “The Board judged that the current mildly restrictive stance of monetary policy remained appropriate.” The OIS market is pricing in just 15 bps of tightening in the next 12 months.

 

Given that, AUD/USD is looking rich at the moment (1.0732). Even if the RBA introduces slightly more constructive rhetoric, we think the rally will be short-lived (48 hours max). It will take a significant hawkish shift to propel AUD back toward a re-test of the all-time highs at 1.10. This would manifest itself in something like the Feb. 2010 statement which said: “The Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.”

 

Share

Euro Rebounds on Greek ‘Plan B’

Positive sentiment emerged in US trading on hopes that Greece will pass an austerity budget and news that Europe is working on Plan B if the vote fails. The euro was the top performer while AUD and NZD lagged on the day. Japanese retail sales are the highlight of Asia-Pacific trading.

EUR fell in early trading and overall sentiment was negative after Moody’s warned that deposits are rapidly being pulled from Greek banks but the trade reversed on talk that Europe may incentivize its banks to rollover Greek debt with a Brady bond-like structure. Greek PM Papandreou also predicted HE WILL HAVE ENOUGH VOTES to pass the austerity budget required for bailout funds. A vote is likely on Tuesday. The ECB’s Stark said the central bank is “very vigilant.” A JULY HIKE IS ALREADY PRICED IN but this helped traders feel a bit more confident about it.

US personal spending was flat compared to the +0.1% expected. Core PCE rose 1.2% y/y compared to the 1.1% expected. Although this is well below the Fed’s threshold, it is moving in higher and we believe it must fall below 1.0% before the Fed considers QE3.

Treasuries fell badly pushing yields higher by 5-9 bps across the curve. The selloff accelerated after a soft 2-year auction. The rising yields underpinned USD against JPY and CHF. Auctions continue on Tues (5yr) and Wed (7yr). The S&P 500 climbed 0.9% to 1280. Gold fell $5 and closed below $1500 for the first time since mid-May.

Comments from the Fed’s Kocherlakota (voter) did not relate to current policy, instead he called on the gov’t to lower the tax deduction on mortgage interest – something that has zero chance of happening in the next five years.

Japanese Retail Sales

Japanese retail sales are expected to be down 2.2% y/y in May compared with a 4.8% drop in April. PM Kan appears to be closer to resigning at the end of the current Diet session in mid-August. Nikkei News reports he has offered to quit once bills are passed authorizing a supplementary budget and deficit financing.

 

Share