Australian Dollar Remains at High Risk with RBA Cut, Chinese CPI Due
It’s the first full week of August and after a letdown last week – the Bank of England, European Central Bank, and Federal Reserve policy meetings were busts, while the July US NFPs deflated momentum behind the recent US Dollar upswing – focus is now on Asia.
Mainly, we are looking at Australia and China, with the Reserve Bank of Australia set to cut its key rate to a new record low in the wake of tighter Chinese credit conditions and slower regional growth. Along the same lines, the extent of the Chinese slowdown will be most visible this week with the July Australian labor market report and the July Chinese CPI report due.
Essentially, this is a make or break for the Australian Dollar: the RBA could lay the groundwork for further rate cuts, which data could confirm; or the RBA could take on a more hawkish tone, and Australian and Chinese data could surprise. In either case, a fight is on for $0.9000 in the AUDUSD, and a break away in either direction after this week will be well-earned.
Rate Hike Probabilities / Basis-Points Expectations
See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
08/06 Tuesday // 04:30 GMT: AUD Reserve Bank of Australia Rate Decision (AUG 6)
The Reserve Bank of Australia will cut its key interest rate to a new record low of 2.50%, a 25-bps drop from the now record of 2.75%. Australia has faced economic strain resulting from a Chinese slowdown and the likely end of the mining boom (and global commodity supercycle). This has placed pressure on the labor market and the budget deficit in light of reduced tax revenue; the housing market is also suffering.
In the July Minutes, the RBA stated “the exchange rate would depreciate further over time as the terms of trade and mining investment declined … The Board also judged that the inflation outlook, although slightly higher because of the exchange rate depreciation, could still provide some scope for further easing, should that be required to support demand.”
Note that since then the meeting, Australia release 2Q CPI figures that were below Bloomberg News survey consensus expectations at 2.4%, versus 2.5% expected. Governor Stevens said that "short of a very, very large depreciation, which of course we haven't yet seen," the inflation outlook shouldn’t prevent further rate cuts. ‘Don’t fight the Fed’ applies here – don’t fight the RBA.
The key pairs to watch are AUDUSD and AUDNZD.
08/07 Wednesday // 09:30 GMT: GBP Bank of England Inflation Report
The Bank of England will release its Quarterly Inflation Report on Wednesday along with a special report about forward guidance. Investors have been trying to decipher where BoE Governor Mark Carney will take monetary policy given his prior dovish proclamations. Governor Carney is known to favor nonstandard policy measures and the usage of forward guidance to signal further easing would be theoretically bearish for the Sterling
The BoE voted 9-0 to maintain monetary policy in Governor Carney’s first meeting. Meanwhile, UK data has been noticeably improved (especially recent PMI surveys).. June CPI printed a +2.9% y/y increase, less than the Bloomberg News survey consensus of +3.0%. UK PMI Construction also came in much stronger than expected today at 57.0 versus Bloomberg News survey expectations of 51.5. Forward guidance will be dovish but it will have little impact over the long haul as long as the recent streak of improved data continues.
08/08 Thursday // JPY Bank of Japan Rate Decision (AUG 8)
The Bank of Japan will release its monetary policy statement on August 8. Note that there is no specified time for this release. Following the rate decision, BoJ Governor Kuroda will detail further monetary policy considerations in a press conference. Some investors have speculated that an LDP majority in the Diet necessitates less easing from the BoJ. Accordingly, investors will watch Kuroda’s rhetoric regarding further easing as well as any comments on the new ruling majority in the Diet.
08/08 Thursday // 01:30 GMT: AUD Australian Employment Change (JUL)
Australia’s economy continues to slump as Chinese commodity demand wanes. Australia’s labor market has consequently suffered from this slowdown, as depicted through the tremendous decline in the AUDUSD. Analysts surveyed by Bloomberg News survey expect a +6.0K gain in employment, a decline from June’s +10.3K gain. While the economy may be discouraging, Aussie bulls may note that five out of the last six employment reports have beat market consensus.
CONSENSUS: +6.0K change; 5.8% unemployment rate
PRIOR: +10.3K change; 5.7% unemployment rate
The key pairs to watch are AUDUSD and AUDNZD.
08/09 Friday // 01:30 GMT: CNY Chinese Consumer Price Index (YoY) (JUL)
Chinese CPI data will be an important barometer for the Chinese economy as it has proven sensitive to changes in growth in recent years. Markets have been eyeing a marked Chinese slowdown in the last two months. A low inflation reading would help affirm stagnating prices amidst credit tightening and the Chinese government targeting overcapacity in steel. On the other hand, a low inflation reading would also add to speculation that the PBOC may ease in order to meet the 7.5% growth goal.
The key pairs to watch are AUDUSD and NZDUSD.
--- Written by Christopher Vecchio, Currency Analyst and Kevin Jin, DailyFX Research
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