Markets Today: You can’t always get what you want

It was a toss-up this morning between the Rolling Stones classic and “You Can’t Hold a Good Man Down” by James and Bobby Purify (et al), both in reference (or deference) to the performance of the Aussie dollar in the aftermath of yesterday’s RBA rate cut.

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It was a toss-up this morning between the Rolling Stones classic and “You Can’t Hold a Good Man Down” by James and Bobby Purify (et al), both in reference (or deference) to the performance of the Aussie dollar in the aftermath of yesterday’s RBA rate cut.

If one of the motives for the RBA electing to cut the Cash Rate yesterday was concern at what inaction might do to the currency (that we reckon, in terms of the RBA’s preferred real trade-weighted valuation metrics, is now back in overvalued territory) then the folks in Martin Place will have been left somewhat aghast to see the currency back above pre-cut levels within about an hour of the announcement. Overnight, AUD/USD has pushed further ahead, making a high of 0.7638 in mid-afternoon London trade – just shy of its best levels in three months.

In truth, if we look at the 24-hour performance across major currencies, the AUD only just makes it into the top half of the G10 table, sitting behind the Japanese Yen (+1.47% after Japan’s fiscal stimulus package underwhelmed) British Pound (+1.2 4%, and where the speculative futures market has been carrying record net shorts) and Swedish Krona (1.02%). The AUD has (just) performed better on the day than the NZD (+0.9% vs. +0.86%) and where it will have dawned on the RBNZ at the end of their day yesterday that a 25 bps rate cut next Thursday, that is more discounted than was an RBA cut heading into yesterday’s decision, is unlikely to make any impression on the currency whatsoever. Or if it does, more likely up than down. Anyone for -50bps, with a strong promise of more where that came from? That’s not the house view by the way, just throwing it out there.  Mild NZD underperformance versus the AUD has come despite the latest Global Dairy Trade auction producing a 6.6% gain in the overall price index.

The common denominator underneath overnight currency moves is the big dollar, which continues to leak lower in the aftermath of last week’s FOMC statement and disappointing Q2 GDP numbers. The Atlanta Fed’s Dennis Lockhart (a current non-voter considered neither a hawk nor dove) has just crossed the wires saying that consumer activity remains very strong and that there’s a fair amount of data to come before the September Fed meeting. But he’s made scant impression on the US rates market or the currency, albeit the Treasury yield curve had earlier bear-steepened with the 10-year 3bps higher. This is despite it being a ‘risk-off’ night led by a fresh pummelling for European bank shares and which sees the VIX a point higher at 13.37. The latter is evidently not enough to support the USD or harm the AUD.

In announcing a 25bps Cash Rate cut yesterday, the Board concluded that “prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting”.

From here, the main debating points in markets are likely to be: (i) does the fact that the major banks have only passed on part of the cut mean the RBA might have to deliver a further near-term cut to achieve the improvement in sustainable growth and greater certainty of the return of inflation to target that this rate cut seeks to achieve?; and (ii) what will the RBA’s new forecast show in the August Statement on Monetary Policy released on Friday? With markets now pricing a further interest rate cut to 1.25%, Q1 GDP coming in stronger than expected and the Q1 CPI slightly above the RBA’s forecast, it’s unlikely that there will be any downgrade to either the growth or inflation track forecast in May. The forecasts will of course also include the technical assumption of a further rate cut as per market pricing.

NAB is forecasting the cash rate to remain unchanged at 1.5% for the foreseeable future. But we now flag the potential for further interest rate reductions in 2017, given the likelihood that Australian inflation is expected to remain very low for an extended period. Should the economic outlook fail to improve or deteriorate, the inflation outlook continues to provide scope for further rate cuts in Australia.

Coming Up

With the dust settling on yesterday’s RBA move, the main domestic economic event in front of Friday’s Statement on Monetary Policy will be Thursday’s retail sales figures (both nominal for June and real for Q2). Today brings NAB’s on-line retail sales index. We’ll also get the AiG performance of services reading for July.  China has its Caixin services PMI (the official version on Monday showed a rise to 53.9 from 53.7).

Offshore tonight the main economic events will be the US ADP private sector employment read out, of some if limited relevance to Friday’s US payrolls report, and the non-manufacturing ISM survey, whose employment sub-reading is also a non-farm payrolls forecasting input.

Overnight

On global stock markets, the S&P 500 was -0.64%. Bond markets saw US 10-years +3.44bp to 1.56%. In commodities, Brent crude oil -0.50% to $41.93, gold+1.0% to $1,364, iron ore -0.5% to $61.94. AUD is at 0.7611 and the range since yesterday 5pm Sydney time is 0.7546 to 0.7634.

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