20th August 2019 - All eyes on the RBA minutes

Good morning


• Europe CPI for July came in at -0.5% MoM and +1.0% YoY, both lower than expectations by 0.1%. Little reaction to the result with the EUR basically unchanged nor to later headlines from the Bundesbank that suggested there was a risk the German economy would contract in Q3 and enter a technical recession. Later headlines that Germany was preparing stimulus measures as a contingency for crisis did see EUR move higher ahead of the NY open. Gains were limited to 1.1114 and somewhat brief with EUR soon back under 1.1100.

• Numerous Brexit headlines including that the UK had significantly stepped up no deal planning. Johnson also again repeated the statement that the UK would leave the EU on October 31 with or without a deal and ahead of a meeting with Merkel and Macron, said that it was up to the EU to compromise.

• President Trump reprised his demands for rapid Fed rate cuts, calling for 1% in cuts in fairly short order, with a QE kicker, because the USD is so strong it’s hurting other parts of the world (and sabotaging his attempts to lower the US trade deficit via tariffs and sanctions), this ahead of FOMC meeting minutes on Wednesday and the Jackson Hole Conference at week’s end.

• On the tariffs and sanctions front, the US Commerce Dept gave American suppliers to Huawei another 90 days to end those relationships, while adding 46 new Huawei entities to the entity list. The pragmatic delay echoes last week’s decision to delay most of the 10% tariffs on the remaining Chinese imports that was due to start September 1.

• Equity markets relished the announcement with the S&P 500 and NASDAQ both climbing over 1% while US yields also rallied with the 2yr regaining 7bps through the session.

• Treasury yields led the broader, risk and fiscal-stimulus-on rebound in rates, helped late in the day by hawkish Rosengren comments, with the long end of the curve propped up a bit more on word the Treasury is considering issuing 50- and 100-year bonds


• Dalian iron ore futures ended lower, with focus shifting to demand prospects clouded by steel production curbs in China, where port stockpiles of the steelmaking raw material climbed for a fifth week in a row. The most-active September 2019 iron ore futures contract was down 0.8% at $86.10 a tonne in late trade, after rising as much as 1.8% earlier in the session.

• Aluminium touched its highest in more than two weeks and copper also rose after China unveiled interest rate reforms that could boost the economy. The move by China, which also fuelled hopes of interest rate cuts, triggered short-covering and came on top of fears of aluminium shortages because of flooding in Shandong province in China, a big producer of the metal. Benchmark aluminium rose 0.1% to $1,794 a tonne in final open-outcry trading, having earlier touched $1,807.50, its highest since July 31. LME three-month copper added 0.5% to finish at $5,774 a tonne.


• EUR ended NY 1.1085 +0.03%; trades slight 1.1109-1.1093 range in NY. Talk of potential EUR 50bn in spending provides superficial lift

• DXY rallied to 2 week highs with weakness in the Euro, JPY and CAD the main drivers.

• AUD was relatively steady once again around 0.6770 but was trading at the lower end of the tight daily range.

• NZD traded in similar fashion, trending lower towards 0.6400 support

• GBP held above the 1.2100 handle ahead of Federal Reserve themes for the week ahead. Tory rebels seeking support in a potential vote of no confidence against PM Johnson.


• Australia - RBA minutes looking for some detail on the ease ‘if needed’ stance

• Canada – July Teranet house prices (lower interest rates are starting to boost prices)

AUD thoughts :

AUD found a sliver of support yesterday as the prospect of stimulus in China and Europe soothed risk sentiment, though the Sino-U.S. trade dispute remained a nagging worry.

AUD was idling at 0.6780, corralled between support around 0.6735 and stiff resistance at 0.6822. China's central bank on Saturday unveiled a key interest rate reform to help steer borrowing costs lower for companies and support the economy. Also helping sentiment was growing speculation about government stimulus in Europe.

Today we await the minutes of the Reserve Bank of Australia's (RBA) August policy meeting which should reiterate that rates could be cut again if needed to lower unemployment and get inflation moving.

Futures imply around a 76% chance of another quarter-point cut to 0.75% in October, though the odds did widen a little last week when jobs data proved surprisingly robust. An easing is fully priced for November, with another pencilled in by March. Analysts suspect the RBA will be very reluctant to cut below 0.5% given the pressure that would put on profits and lending in the domestic banking system.

Technical outlook : AUD remains unaided by risk recovery, stimulus plans & Fed view. The China easing may prolong trade war, weaken CNY & AUD. The rebound in stocks & treasury yields weighs on AU/US rate spreads. AUD continues to lose ground ahead of the release of the RBA Meeting Minutes. The level to beat for bears is the 0.6760 level.

AUD is trading in a bear trend below its main simple moving averages (SMAs). The market is challenging the 0.6760 support. A break below this level could see the market decline towards 0.6740, 0.6715 and 0.6675 in the medium term. Immediate resistance can be seen at the 0.6785 level.

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