Reserve Bank of Australia cuts interest rates for the third time this year
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Dollar/CAD benefitted nicely from a NY close above the 1.3230s yesterday and AUDUSD sales in the overnight session, and it has seen another thrust higher over the last hour after Canada reported weaker than expected GDP growth for the month of July (0.0% MoM vs +0.1%). Familiar chart resistance in the 1.3280s has reasserted itself however as traders now prepare for the September ISM Manufacturing report out of the US. The market consensus is looking for a read of 50.1.
NOV CRUDE OIL DAILY
Euro/dollar is trying to bounce this morning following slightly better than expected final reads on the September Manufacturing PMIs out of Germany (41.7 vs flash 41.4) and the Eurozone (45.7 vs flash 45.6), but sellers have appeared once again at trend-line resistance just above the 1.0900 level. We think the JGB influence on German bund yields this morning has been mildly supportive for EURUSD (more on this below). Over 1.6blnEUR in options expire at the 1.0945-55 strikes this morning, but we think they’re a ways off current prices to have much influence over prices. Expect some short covering in EURUSD however should the US ISM report surprise to the downside. The next resistance levels in EURUSD come in at the 1.0930s and the 1.0950s.
DEC GOLD DAILY
Sterling has broken trend-line chart support in the 1.2270s this morning as it appears traders are having a hard time believing Boris Johnson’s new plan to deal with the Irish backstop, which is now expected to be unveiled to the EU before Thursday this week. More here from EuroNews. This morning’s better than expected September Manufacturing PMI read for the UK (48.3 vs 47.0 expected) is also being brushed off by the markets because it was largely influenced by increased inventory building (new orders, output and employment measures all fell further). Traders are now wrestling with the next major chart support level in the 1.2220-30s. Similar to EURUSD, we think a weak read on US ISM at 10amET could allow the market to bounce.
The Reserve Bank of Australia caved to market demands again last night. Despite re-emphasizing that the Australian economy had reached a “gentle turning point” and that “employment has continued to grow strongly”, the RBA cut its cash interest rate again by 25bp to 0.75%, citing subdued inflation/wage growth, the 5.25% unemployment rate, the US-China trade dispute, and “forces leading to the trend to lower interest rates globally”. What is more, the Australian central bank kept further interest cuts on the table when discussing its forward outlook. “It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.” RBA Governor Lowe spoke earlier this morning at an RBA Board dinner and referred to today’s interest rate cut as a “insurance cut”. He also took a page out of Mario Draghi’s playbook and said it was time for governments and business to step up and help arrest the decline in growth, not central banks.
The Australian dollar is not taking well to the news and has collapsed through two chart support levels in overnight trade. AUDUSD has now also just broken chart support in the 0.6690 area, and we think the funds (who covered AUD short positions in recent weeks) are likely chasing the market lower here. The OIS market is now pricing in a 57% chance that the RBA will cut interest rates for the fourth time this year on November 5th.
It’s truly remarkable to us how central banks continue to justify their stubborn inflation and unemployment rate mandates as justification for the continued use of recession-type monetary policy measures. Money markets are not concerned about these measures in the slightest in our opinion. They’re concerned about something far worse but no central banker in the world will admit it.
Dollar/yen continued higher to trend-line resistance in the 108.40s during overnight trade, but this time it’s been led by a surge in JGB bond yields. The most obvious catalyst was Japan’s latest 10-yr JGB bond auction, which had a very poor turnout earlier today (bid-to-cover ratio at 3.42, the lowest since 2016). But why? We’ve heard reports that Japan’s Government Pension Investment Fund (GPIF) said it will consider currency-hedged overseas bond holdings, as it’s already close to the 19% limit in its current mandate. We’re also hearing this could be investor angst following the BOJ’s decision on Monday to once again “tweak” the amount and frequency of bond purchases it makes at the long end of the curve (this wasn’t market moving news at the time though). The steep selloff in Japanese bonds caused Japan’s Securities Clearing Corp to reportedly issue margin calls, which in turn led to further selling, leaving the benchmark JGB bond yield a whopping 7-8bp higher from yesterdays’ close. This JGB yield move is driving US and German yields higher too this morning. Next up is the US ISM Manufacturing PMI for September at 10amET, where traders are expecting a read of 50.1. We still think a strong move above the 108.40s in USDJPY could usher in a longer-term, positive, trend change for the market.
JAPAN 10YR BOND YIELD DAILY
Charts: Reuters Eikon
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