RBA Cuts and USD Rots

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Market Drivers May 3, 2016

AU RBA Cuts to 1.75%
UK PMI Manufacturing lowest in 3 years
Nikkei closed Dax -1.51%
Oil $44/bbl
Gold $1299/oz.

Europe and Asia:
AUD RBA cuts by 25bp
GBP UK PMI 49.2 vs. 51.2
EUR PPI 0.3% vs. 0.0%

North America:
No Data

The Reserve Bank of Australia surprised the currency market today and cut rates by 25 bp taking the benchmark below the psychologically key 2% mark and sending Aussie below 7600 in late Asian and early European trade.

The RBA cited the strong Australian dollar and low level of inflation as key drivers for its decision and the move was clearly an attempt to stem the carry trade flows that have poured into the Aussie in the wake of Fed’s persistent dovishness. The Fed’s reluctance to normalize policy and signs of global economic slowdown have clearly changed the calculus for RBA which as recently as last month appeared to be content to keep rates stationary for the foreseeable future.

The RBA noted that recent actions by Chinese policymakers were supportive of near term growth outlook, but privately Australian policymakers must be worried that the latest rally in commodities is unsustainable. Chinese demand remains soft with tonight’s Caixin PMI coming in at 49.4 versus 49.8 eyed as it stays in contractionary territory. The move today therefore was both a response to the weak US dollar and an anticipatory attempt to ease credit ahead of potential slowdown in growth in the second half of the year.

The weakness in US dollar was once again the dominant theme elsewhere in FX today with EUR/USD climbing through the 1.1600 barrier before coming under a bit of profit taking and USD/JPY dropping through the 106 figure as the key 105 level came into view. With US economic data showing some deceleration the market has given up on any chance of a rate hike by the Fed and the dollar dump has now turned into a momentum move. The unit is grossly oversold at this point, but unless this week’s ISM Non-Manufacturing and NFP data can surprise to the upside any bounce is likely to be shallow and short lived.

Finally in UK the PMI Manufacturing report missed its mark printing at 49.2 versus 51.2 eyed as it went into contractionary territory hitting its lowest mark in nearly 3 years. While domestic demand remained relatively firm, export orders slowed on fears of Brexit. That same dynamic may show up in the much more important PMI Services report due Thursday and could start to weigh on cable which has been propped by anti-dollar flows and persistent polls showing the Remain vote in the lead. Cable dropped below the 1.4700 level in the aftermath of the report and could drift lower as the day proceeds as markets begin to focus on economic weakness in UK rather than the relief of political risk.

Boris Schlossberg
Managing Director

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