The Reserve Bank of Australia lowered the cash rate target 25 basis points to 2.00% as expected, but guidance was apparently not as dovish as the market was pricing in. Governor Glenn Stevens’ rhetoric was relatively balanced. On the one hand he bemoaned the risks to private demand from weak business capital spending, saying: “The economy is therefore likely to be operating with a degree of spare capacity for some time yet.”
On the other hand, Stevens also noted improved consumption and employment numbers as a promising development. The market’s immediate takeaway seems to be that this is a “wait-and-see” statement and takes away the prospect for a further easing bias that was priced in more aggressively coming into this meeting. It will take a material worsening in Australian activity numbers or weak commodity prices/extremely weak risk appetite to push AUD lower from here.
So from here, the upside story for AUDNZD might well continue apace, particularly on weak New Zealand data and more dovish Reserve Bank of New Zealand risks, but AUDUSD upside may be quickly capped, particularly if we get a solid round of US data through the end of this week.
The short-term interest rate spreads suggest that AUDUSD is relatively fairly priced after tonight’s reaction. It should be noted that the statement continues to contain fairly sharp wording on the exchange rate: “Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.”
Chart: AUDUSD
After the RBA meeting, the AUDUSD launched a sharp rally on what the market sees as a relatively hawkish shift to flat forward guidance from a more clearly easing bias. Still, the bearish case looks intact here as long as we continue to trade south of 0.8000, and any coming closes below 0.7800 after US data later this week will encourage the view that we are on our way to testing the lows for the cycle again toward 0.7533.
Today will be about whether the USD continues to get traction, especially after the US ISM non-manufacturing survey which covers the dominant services sector of the US economy. It looks like the market is swinging back to pricing in stronger US data - though a unambiguously strong US employment report this Friday is by no means yet priced in.
EURUSD is pushing lower this morning and we may see a full test of the pivotal 1.1000/50 zone ahead of the Friday numbers. Traders should also note the most important market at the moment: long government bonds, where yields are rising rapidly and where the US 10-year note and 30-year T-bond yields are challenging their respective 200-day moving averages. Further upside from here would serve as a significant headwind for risk appetite eventually - and USDJPY might finally make a bigger move out of the tight range.
The UK election is up on Thursday, but all of its implications may take much of Friday to work through and full clarity may not emerge until Monday – generally negative on GBPUSD post-election, but the EURGBP rally may be short-term overdone.
The G-10 rundown
USD: This Friday’s payrolls is looking like a very key test for the USD – though we shouldn’t underestimate short-term volatility potential if today’s US ISM non-manufacturing survey significantly surprises.
EUR: Broadly easing lower after the recent squeeze and likely can only thrive from here on negativity elsewhere, as only over-exuberant shorts are the fuel for any renewed euro upside, rather than any prospect for fundamental support.
JPY: Doing its usual thing and trading in the crosses like a low-beta version of the USD, but will that remain the case if US interest rates are breaking.
GBP: EURGBP went too far too fast to the upside and we may get a bit of mean reversion until the election results begin rolling in.
CHF: EURCHF merely passively following the direction in EURUSD and EURJPY over the last couple of sessions, but EU peripheral spreads have run significantly lower – a bit hard to understand CHF drivers – only clarity is that USDCHF looks underpriced if US data makes a comeback.
AUD: Jumping higher post-RBA, but there is little further fuel for this move in terms of interest rate expectations in AUDUSD unless US data disappoints. AUDNZD may be another story depending on upcoming NZ data.
CAD: Fumbling around for support in the 1.2100 area ahead of the key US data and Friday’s Canadian employment report. USDCAD needs 1.2400 to switch fully back to rally mode.
NZD: Trading passively ahead of tonight’s important employment data, which is only published quarterly.
SEK: Thoroughly confusing action, with the latest sell-off discouraging the view higher - but we’ve been range-bound for many weeks and it is hard to find a directional argument when both central banks are trying to out-dove one another.
NOK: Awaiting Thursday Norges Bank – short rates have spiked considerably higher from March lows – hard to see further upside catalyst for rates from here for Norway, so leaning on downside risks for NOK.
Economic Data Highlights
- Australia Apr. AiG Performance of Services Index out at 49.7 vs. 50.2 in Mar.
- Australia RBA cut Cash Rate Target 25 bps to 2.00% as expected
Upcoming Economic Calendar Highlights (all times GMT)
- Sweden Mar. Industrial Production/Orders (0730)
- UK Apr. Markit/CIPS Construction PMI (0830)
- Euro Zone Mar. PPI (0900)
- Canada Mar. International Merchandise Trade (1230)
- US Mar. Trade Balance (1230)
- US Apr. Final Markit Services PMI (1345)
- US ISM non-manufacturing PMI (1400)
- Bank of Canada’s Wilkins to Speak (1630)
- New Zealand Q1 Average Hourly Earnings (2245)
- New Zealand Q1 Unemployment Rate and Employment Change (2245)
- Australia Mar. HIA New Home Sales (0100)
- Australia Mar. Retail Sales (0130)
- China Apr. HSBC Services PMI (0145)