The Aussie was found lower against all the other G10 currencies this morning, pressured by RBA Gov. Lowe’s remarks that the Bank remains willing to ease further in order to make sure inflation returns to its range. As for today, the spotlight will turn to the ECB decision, where we expect the Bank to lay the groundwork for additional stimulus in September.
The dollar pulled back against most of the other G10 currencies yesterday and during the Asian morning Thursday. It gained only against AUD and EUR in that order, while it traded virtually unchanged versus CAD and JPY. The greenback underperformed the most against SEK, NOK and GBP.
The big loser was the Australian dollar, which came under selling interest overnight after RBA Governor Philip Lowe said that the Bank remains willing to ease further in order to make sure inflation returns to the 2-3% target range. His remarks come as Australia’s government has been reviewing the central bank’s target, and there have been calls for the Bank to lower that range as inflation has been running below its lower end for the last few years. However, the Governor added that “Lowering the target might have the short-run advantage of allowing us to say we have achieved our goal, but shifting the goalposts hardly seems as good way to build long-term credibility”.
At their last gathering, RBA policymakers decided to cut rates for the 2nd time in a row, and noted that they will continue to monitor developments in the labor market closely and adjust policy “if needed” to support sustainable growth and the achievement of the inflation target. In June, the guidance was the same but without the “if needed” part. So, in our view, its addition meant that, although the door for further action was not closed, the RBA was not in a rush to cut again. Market participants appeared to have held the same view, as according to the ASX 30-day interbank cash rate futures implied yield curve, they were almost fully pricing in the next quarter-point cut is to come in December.
That said, last week’s employment data showed that the unemployment rate remained at 5.2% in June, above the 4.5% mark, which the RBA believes would start generating inflationary pressures, while the net change in employment tumbled to 0.5k from 42.3k in May. Thus, coming on top of this important set of data, Lowe’s remarks prompted investors to bring forth the timing of when they expect the RBA to cut another 25bps in interest rates. According to the ASX futures, the next rate decrease is now nearly factored in for October. Next week, we get the Australian CPIs for Q2, where a disappointment could bring that timing closer, perhaps to September.
The pound was among the winners, staying under buying interest after Boris Johnson officially took office. In our view, this is nothing more than covering prior short positions and not the beginning of a sustained recovery. As we noted on Tuesday, a Johnson victory has been already priced in and such a confirmation could trigger a “buy the fact” response. Even if the currency continues to travel higher for a while more, we would treat that as a corrective move, and we would still consider the path of least resistance as being to the downside. Johnson’ stance keeps the risk of a no-deal Brexit well on the table, which combined with expectations over a dovish shift by the BoE is likely to keep a lid on any further pound gains.
From around the end of June, AUD/JPY continues to move in a range, roughly between the 75.12 and 76.28 levels. At the time of writing, we can see that the pair is now closer to lower side of that range, after reversing to the downside on Tuesday. But in order to examine further declines, we will wait for a confirmation break of the lower bound of the range first and only then target lower levels.
If, eventually, the 75.12 hurdle breaks, this would confirm a forthcoming lower low and could clear the path to the 74.80 zone, marked near the highs of June 17th and 24th. The pair might stall there for a bit, or even correct to the upside again. But if it struggles to move back above the 75.12 barrier, this could attract the bears into the field again and AUD/JPY may drift lower, potentially bypassing the 74.80 area, and aiming for the 74.32 mark, which is the low of June 25th.
On the other hand, if the pair reverses and pushes above 75.55 hurdle, marked by today’s high, this could invite more bulls back into the field, who may help the rate to move a bit higher within the aforementioned range. The next possible target could be around the 75.81 zone, which is near the low of July 21st and near the intraday swing high of July 23rd. If that area is just seen as a temporary obstacle on the pair’s way higher, AUD/JPY could continue moving up, aiming for the 76.15 mark, or even the 76.28 level, which is the upper side of the range.
Passing the ball to the euro, the common currency was the second loser in line, staying pressured after the Euro area PMIs disappointed, and thereby bolstered the case with regards to a dovish ECB today. The first hit came after the German manufacturing index dipped further into the contractionary territory, hitting its weakest print in almost 7 years. The Euro-area manufacturing index slid as well, instead of staying unchanged, which combined with the expected slide in the services print, pushed the composite PMI down to 51.5 from 52.2
Now all the attention is likely to turn to the ECB and its monetary policy decision. When they last met, Euro-area policymakers pushed back their guidance on interest rates, noting that they are expected to stay untouched “at least through the first half of 2020”. That said, at the press conference following the decision, President Draghi noted that several members raised the possibility of further rate cuts, while others talked about restarting QE in case of adverse contingencies. A couple of weeks thereafter, he himself said that additional stimulus will be required if a sustained return of inflation to the ECB's aim is threatened, prompting investors to ramp up bets with regards to lower rates soon.
According to Eurozone’s money markets, investors are now more-than-fully pricing in a 10bps cut in the deposit rate for September, while there is a 48% chance for such an action to take place today. However, taking into account a recent report noting that the ECB officials may not rush into additional easing in July, we don’t expect any stimulus measures to be introduced at this gathering. Apart from the aforementioned report, we base our view on the notion that the ECB tends to introduce fresh measures at meetings accompanied by updated economic projections. What’s more, some key figures, like the Q2 GDP and the July inflation prints, will be released after this meeting and may help officials decide how to respond. We believe that today, they will use the gathering to lay the groundwork for a potential action in September, perhaps by altering their forward guidance. It would be also interesting to see whether we will get any clues on what form any additional measures could possibly take. Will we get a 10bps cut in September, a restart of the QE, or both?
As for the euro, a dovish stance just to signal a September action may not prove that negative. It could even trigger some short covering. After all, the currency tumbled notably recently, which suggests that EUR-traders have already factored that in. For the euro to extend yesterday’s tumble, we believe that officials would have to hint something beyond a 10bps cut for September. As we already noted, they may have to signal that a restart of the QE could also be underway. In our view, the least likely scenario is the one where officials decide to cut rates today. If this happens, the euro is likely to fall off the cliff.
Overall, EUR/AUD is still trading below a short-term tentative downside line taken from the high of June 25th. Recently, the pair found some good support near the 1.5893 hurdle, from which it bounced and is now trying to make its way back up again. But as long as EUR/AUD stays below the above-mentioned downside line, any move higher will be considered as temporary correction, before another leg of selling.
A push above the 1.5976 hurdle, which marks yesterday’s high, could lead the rate further north. The pair would already be above the 50 EMA, as more bulls could be joining into the game. EUR/AUD could make its way closer to the 100 EMA, or the 1.6035 barrier, marked by the high of July 17th. Slightly above it runs the aforementioned downside line, which may help keep the rate down. If this is successful, the bears might see it as a good opportunity to step in and drive the pair back down again, initially targeting the 1.5976 zone, a break of which could send the rate sliding to the 1.5945 hurdle, marked by today’s low.
Alternatively, if the aforementioned downside line breaks and the pair climbs above the 1.6074 mark, which is the high of July 15th, this could also place the rate above the 200 EMA on the 4-hour chart. Such a move may be seen as cue for more buyers to step in, and thus, we will then examine the next potential resistance area, at 1.6115. A break of that zone could lift the pair a bit higher again, aiming for the 1.6152 level, marked by the inside swing low of July 10th.
Ahead of the ECB decision, we get the German Ifo survey for July. Both the current assessment and business expectations prints are expected to have declined slightly, to 100.4 and 94.0 from 100.8 and 94.2. This would drive the business climate index down to 97.1 from 97.4. That said, taking into account that both the ZEW current conditions and economic sentiment indices dropped notably and by more than anticipated, we see the risks surrounding the Ifo forecasts as tilted to the downside. In other words, we see a decent chance for the indices to slide beyond estimates.
Later in the day, the US durable goods orders for June are scheduled to be released. Headline order are expected to have rebounded 0.7% mom after tumbling 1.3%, but the core rate is anticipated to have slid to +0.2% mom from +0.4%. Initial jobless claims for the week ended on July 19th are also coming out and are set to rise to 219k from 216k. However, this would drive the 4-wk moving average down to 216.25k from 218.75k.
As for tonight, during the Asian morning Friday, Japan’s Tokyo CPIs for July are coming out. Both the headline and the core rates are expected to have ticked down to +1.0% yoy and +0.8% yoy from +1.1% and 0.9% respectively.
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