15th July 2019 - Jawboning and rate cuts to curb Aussie's rise

Good Morning,

Market Headlines

- US equities continued to benefit from the likelihood of lower Fed interest rates, the S&P500 up 0.5% to a fresh record high. US bond yields were little changed, torn between the prospect of a rate cut on 31 July and stronger PPI inflation data


- The US dollar index closed down 0.3% on the day.

- EUR ranged sideways between 1.1240 and 1.1275.

- USD/JPY fell from 108.50 to 107.80.

- AUD rose from 0.6990 to 0.7025.

- NZD rose from 0.6680 to 0.6699.

- AUD/NZD rose from 1.0470 to 1.0493.

AUD Thoughts

AUD/USD is soft in the Asian open this week ahead of key U.S. retail sales and more Fed' speakers.

AUD/USD is currently trading at 0.7016 in a tight range, facing 4th July support turned resistance.

The Aussie was trading higher into the close last week, fuelled by a persistent expectation of a rate cut this month from the Federal Reserve, (Fed'), as Fed speakers maintain a dovish tone despite better than expected data. The Richmond Fed President Barkin echoing Fed Chair Powell’s concerns over the headwinds facing the global economy and Chicago Fed President Evans also hinted at an easing bias.

Earlier in the week, the U.S. Consumer Price Index beat expectations, and on Friday, US producer prices came in better than expected in June. this was yet another sign of inflation in the economy - yet the Dollar was unable to capitalise on that and AUD/USD continued to rise. Producer Prices beat market expectations and increased by 0.3% m/m in June (after increasing 0.2% m/m in the month prior) - up on a year-on-year basis, to 2.3% in June, unchanged from the month prior.

"With numerous Fed speakers brushing off the recently upbeat data pulse while maintaining a firm easing bias, markets are all but certain that the Fed will cut rates by at least 25bp at the upcoming FOMC meeting," analysts at ANZ Bank explained. Risk on was the theme, which benefitted the commodity complex, while US equities closed the day at record highs, with the S&P and DJIA up 0.5% and 0.9% to 3013.77 and 27332.03 respectively.

Looking ahead, Japanese markets are closed today for a public holiday so there is unlikely to be much action in Asia. However, for the week ahead, Fed speakers will once again be in focus. "We look for remarks by Fed Chair Powell and NY Fed President Williams to further solidify the case for a 25bp cut at the July FOMC meeting. Chair Powell reiterated the Fed's desire to "sustain the economic expansion" and Williams acknowledged that arguments for policy easing have strengthened. Look for further remarks by voters Evans, Rosengren and Bullard," analysts at TD Securities explained. Also, U.S. Retail Sales will likely draw benefit from sound consumer fundamentals.

Jawboning and rate cuts to curb Aussie's rise

However, Australian stocks have been underperforming as investors remain concerned about trade and the benchmark suffers biggest weekly drop since May with Miners pushing the Australian share-market lower. Indeed, the Aussie trades as a proxy to the trade dispute between the U.S. and China, but the Reserve Bank of Australia, (RBA), is also on the backfoot, in defensive mode. Despite expectations of an additional rate cut from the RBA, the Aussie is higher now than it was before the RBA first eased on June 4, and well above its recent five-month trough of $0.6832 - Jawboning is to be expected as a continuation higher is likely to damage the country's export sector.

Event Risk Data Today

- NZ: Services PMI and migration are typically not market movers.

- China: Q2 GDP is expected to show the annual pace decline to 6.2% from 6.4% with momentum in manufacturing being curtailed by US tariffs as well as the lingering impact of 2017 and 2018’s investment reforms. Jun NBS monthly data release will provide updates on fixed asset investment, retail sales and industrial production.

- US: Fedspeak involves Williams at the “LIBOR Transition Briefing: The Transition to Alternative Reference Rates”.

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