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Rate-Cut Rumors Heating up Down Under

Rate-Cut Rumors Heating up Down Under

Boris Schlossberg, Technical Strategist

Slow Australian retail sales data and a big downside miss in Chinese services PMI have the Australian dollar (AUD) reeling, and the markets are on high alert for a rate cut at this week’s RBA policy meeting.

It has been a predictably quiet start to the week in the currency markets, with both Tokyo and London off on holidays, which has created thin trading conditions so far. The biggest loser overnight was Australian dollar (AUD) after a series of disappointing data points from both Australia and China raised speculation about a potential rate cut at tomorrow's Reserve Bank of Australia (RBA) meeting.

Australian retail sales contracted in March, printing at -0.4% versus 0.2% expected. The report showed spending on clothing, footwear, and personal accessories fell 4.2 percent, and consumers spent 1.5 percent less on household goods. On an inflation-adjusted basis, retail sales increased by 2.2% versus 1.7% forecast for the three months through March, but the number was nevertheless a disappointment because it clearly showed slowing demand.

The slowdown in economic activity was also reflected in the ANZ job advertisement figures, which dropped -1.3% from -0.5% the month prior. This was the second consecutive negative print this year. Finally, China's services PMI badly missed its mark, printing at 51.1 versus 54.3 in March.

The overall news from down under set investors in a foul mood, and the market now anticipates a 55% chance of a rate cut at tomorrow's RBA policy meeting. Australian policymakers have been clearly frustrated with the strength of the aussie, which they feel undermines export competitiveness and weighs on growth.

See related: Australian Dollar Sold on Rate Cut Bets

A spokeswoman for Treasurer Wayne Swan said in an e-mailed statement, "There's no doubt that the persistently high dollar continues to have an acute and widespread impact on prices and profitability across the board, which has been one of the key drivers behind the recent hit to government revenues."

The AUD remained heavy all night long, sinking to a low of 1.0245 versus the US dollar (USD) in mid-morning European trade. The AUDUSD pair may test the recent lows of 1.0225 as the day progresses, but if the RBA does cut rates, and worse yet, suggests that it may ease policy further in the foreseeable future, the pair could quickly tumble to test support at parity as the recently laid carry trades are quickly unwound.

Eurozone PMI Gives New Glimmer of Hope

Meanwhile, the mood was slightly better in Europe, where Eurozone Service PMIs showed a modicum of improvement. The report printed at 47 versus 46.3 expected, and while that is still well below the 50 boom/bust line, it was nonetheless better than forecast. The news suggests that the beleaguered Eurozone economy may be in the process of bottoming out as demand finally stabilizes.

USD/JPY Eyes Latest Test of 100

With the US economic calendar empty today, trading in the North American session may be subdued, although some positive follow through from Friday's non-farm payrolls (NFP) report could buoy risk flows as the day unfolds.

USDJPY has traded well in the overnight session, inching its way towards the 99.50 level and again shifting the focus to the 100 mark. There is very little US economic data this week, but if risk flows remain positive, the pair could make another run at the key psychological resistance level.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.