Aussie, Yen Rally as Markets Challenge Policymakers

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Market Drivers August 2, 2016

RBA cuts but Aussie rallies
Abe stimulus fails to impress
Nikkei -1.47% Dax -1.27%
Oil $40/bbl
Gold $1365/oz.

Europe and Asia:
AUD Trade Balance -3.195B vs. -2B
AUD RBA cuts 25bp
GBP UK PMI Construction 45.9 vs. 42.4

North America:
USD PCE Index 08:30
USD Personal Income/Spending 08:30

Moves by policymakers in Asia were both roundly ignored by the market as Aussie rallied in the faced of an RBA rate cut while yen also strengthened despite fresh attempts at fiscal stimulus by Prime Minister Abe.

In Australia the RBA cut rates by 25bp to 1.50% as anticipated noting that global growth has slowed below average pace and that further appreciation of the exchange rate would complicate the economic transition in Australia. The RBA acknowledged that growth in Australia expanded at a moderate pace, but noted that inflation would remain low for the foreseeable future which it seeming implied allowed for looser monetary policy.

It appears clear that the RBA move was prompted more by exchange rate considerations rather any immediate threats to economic growth and the central bank offered no further guidance as its intentions ahead, although the next point of focus for the market will be the quarterly forecast update due this Friday.

The Aussie did a small dip below the .7500 figure but then proceeded to rally for much of the European session as traders viewed the move as “one and done” by the RBA. Although Aussie only sports a 150 basis point yield as a result of the latest policy actions it is still one of the highest yielders amongst the majors as such provides one of the few avenues left for carry in the market. It quite likely therefore that the market will test the RBA resolve and could push Aussie to test its recent highs near the .7700 level.

In the meantime in Japan, Prime Minister Abe attempts at stimulus were met with scepticism by the market as the 28 T of new measures came in as largely expected by the market and officials once again denied any intent to issue 50 year JGBs which would be seen as backdoor “helicopter money” by the market and would therefore rally USD/JPY with greater force. Instead the pair slipped below the 102 level on disappointment and could drift towards 101.00 as the day proceeds.

Japanese policymakers now face a serious dilemma as the pair has unwound most of the gains of the prior three week and now stands perilously close to the 100.00 level. Most Japanese officials have acknowledged that the country cannot escape deflationary pressure at these exchange levels, therefore Japanese authorities may be forced to once again consider intervention although prior episodes have proved futile.

In any case Japan is unlikely to make any moves on that front until after the FOMC decision in September, hoping that the Fed could strengthen the pair via removal of accommodation. At this point such a scenario appears highly unlikely as US GDP has proven to be a disappointment and will keep the Fed on sidelines until the end of the year. Still markets will be keen to see further signs of consumer strength which was the one bright spot in last week’s report and to that end if today’s Personal Income/Spending data beats its mark, USD/JPY could rally back through the 102.00 figure as the day proceeds.

Boris Schlossberg
Managing Director

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