Market Drivers October 1, 2019
RBA cuts rates
BoJo has a plan
Nikkei 0.59% Dax 0.38%
UST 10Y 1.70%
Europe and Asia:
RBA cuts 25bp
CAD GDP 8:30
USD ISM Manufacturing 10:00
The RBA cut rates by 25bp taking the benchmark rate to an all-time low of 75bp as the central bank remained concerned about the downside risks in the global economy. The news helped to push Aussie to the .6700 figure where it found a modicum of support in early European trade.
The RBA stated that “While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US-China trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans because of the increased uncertainty.
Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation.
The Australian economy expanded by 1.4 percent over the year to the June quarter, which was a weaker-than-expected outcome. A gentle turning point, however, appears to have been reached with economic growth a little higher over the first half of this year than over the second half of 2018.”
The modestly dovish tone of the statement suggested that RBA was open to further rate cuts but only if growth slowed further. Given the emphasis on “gentle turning point” AU monetary authorities are clearly hoping to hold rates at the current level for the foreseeable future.
Aussie traded down to .6700 but that level represents a triple support area and given that the rate cut was expected it’s unlikely the pair will move much lower on current news unless US-China trade tensions and general risk flows worsen.
In the UK, PM Johnson made an announcement that his government will have a fresh proposal for the EU on the Northern Ireland border. Although Mr. Johnson refused to release the details just yet, he insisted that this was a substantively new approach.
Most likely Mr. Johnson will propose some sort of “soft border” that will rely on technology rather physical barriers to enforcing customs regulations and it remains to be seen if EU will even consider such a compromise, but cable popped on the news through the 1.2300 level but stalled at that figure for the time being.
We have long argued that Brexiteers desperate for a deal will ditch the NI border issue in order to ensure that Brexit goes through and it appears that Mr. Johnson is clearly moving in that direction which should be mildly supportive of cable for now, but markets will want to see signs of progress before reacting more to the news.
In North America, the docket contains US ISM Manufacturing data with the market looking for a return to expansion. Ahead of the report USDJPY was well bid making another run towards the 108.50 figure and if the number does show that manufacturing has improved it could make a run to 109.00 on hopes that the US economic slowdown is over.