Author: Steve Oram
The RBA left the official cash rate unchanged at 1.50% stating “The Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. In doing so, it recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings.”
Further, they say “The outlook for the global economy remains reasonable, although the risks are tilted to the downside. So it would appear that the RBA is in data dependent mode when assessing if a cut is appropriate going forward. The AUD rallied more than 0.5% against the USD initially on the announcement but rallies were capped as Trade War fears remain.
The majority of 42 economists in a Reuters poll still expect at least 2 cuts by the year end, a move is fully priced in for July with a further cut in December currently a 92% probability. Another poll of 43 analysts found the median forecast put the Aussie at $0.7100 on a one- and three-month horizon, unchanged from the previous poll in April. Seems rather optimistic given the AUD fell three weeks in a row and was at 0.6985 close on Friday. For such an outcome the RBA would need to continue on their hold policy for the year and eschew any cuts.
Westpac have been long known for their call of the first of two cuts in August, whilst the ANZ expect cuts to consolidate the AUD below 0.7000 depending on how aggressive the RBA become will be their main driver for how far the currency falls. Their head of FX research sees fair value currently on the currency pair at 0.6500. Focus now for the AUD will be on the RBA’s quarterly economic outlook due on Friday morning.
RBNZ in focus today
The RBNZ meet today at 2pm for their rate decision and will be the first meeting held under their new committee structure, where 7 members will vote on the rate decision. Previously this was the sole decision of the RBNZ Governor. Markets are now pricing in a chance of a rate cut just below the 50/50 mark as a touch of optimism returns, with the possibility we may see the RBNZ follow the RBA’s lead and hold rates.
Trade Tensions Rise
Markets dumped risky assets and US stocks as trade tensions increased between the US and China as global growth fears rise. News that China is sending their top negotiator, Vice Premier Liu, helped eased concerns with trade negotiations resuming tomorrow for 2 days. The safe-haven Yen is the best performing currency rising 0.6% against the AUD as markets take a risk-off approach.
Australian shares are expected to fall heavily today they follow Wall Streets lead, experiencing its worst sell-off in months.
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