Australian Dollar Little Changed as RBA Holds Rates on Hold at 4.5%

Key Overnight Developments

• RBA Holds Rates Unchanged, Says CPI May Top 3% Temporarily
• Australian Building Approvals Unexpectedly Drop for Third Month
• Dollar, Yen Stage Mild Recovery as Markets Digest NY-Session Gains

Critical Levels

The Euro and the British Pound tracked slightly lower in overnight trade, down 0.1 percent apiece against the US Dollar as the greenback (along with the Japanese Yen) digested NY-session losses. The two safety-linked currencies came selling pressure as stocks rallied on Wall Street, boosting carry trades funded cheaply in perennial low-yielders. We remain flat EURUSD and GBPUSD.

Asia Session Highlights

The Reserve Bank of Australia kept interest rates unchanged at 4.50 percent as expected. RBA Governor Glenn Stevens said the current monetary policy setting is “appropriate” considering “interest rates to borrowers [are] around their average levels of the past decade [while] growth is likely to be close to trend [and] inflation close to target.”While the RBA chief cautioned once again that “underlying inflation is likely to be in the top half of the target zonewhile CPI inflation will probably be just above 3 per cent for a few quarters,” this owes to temporary factors including tax changes and increases in utilities prices, hinting that higher consumer price growth readings may not warrant renewed tightening in and of themselves. Stevens remained cautious on the outlook for global recovery, saying growth in China is “moderating” while European prospects remain uncertain “given planned fiscal contraction.”

Separately, Building Approvals proved disappointing, sinking 3.3 percent in June to mark the third consecutive decline. Economists were expecting a 2 percent increase ahead of the release. The outcome likely owes to higher borrowing costs as the central bank’s previous tightening efforts filter through into the economy, reinforcing the likelihood of a static monetary policy for the time being. Retail Sales printed slightly softer than expected, adding 0.2 percent in June to fall short of forecasts calling for a 0.4 percent increase.

Euro Session: What to Expect

Switzerland’s Consumer Price Index headlines a decidedly lackluster economic calendar in European hours, with expectations calling for the annual inflation rate to tick higher to 0.7 percent in July. On balance, the outcome is unlikely to prove particularly market-moving. Indeed, price growth remains well below the central bank’s target while downward pressure from an economic slowdown in the EU – Switzerland’s largest export market – hints that headline inflation figures are unlikely to run higher in a meaningful way for the time being. Turning to risk sentiment, US stock index futures are down 0.2 percent in late Asian trade, hinting the safety-linked US Dollar and Japanese Yen may extend overnight gains into the European session. Traders will also keep a close eye on the earnings calendar, with 31 S&P 500 companies including Pfizer, Mastercard, Dow Chemical and Procter & Gamble set to report second-quarter results ahead of the opening bell on Wall Street.

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