EUR optimism subdued amid trade, impasse on EU executive positions
Over a month has passed since European Parliament successors have been elected while newly elected 28 national leaders from Europe Commission, which already gathered three times this year to elect their President, could not come up with a final decision so far, an unusual case which confirms that EU Parliament is set for further deadlocks along the way. Four additional functions including ECB and EU Parliament presidents, head of European Council and top EU diplomats positions remain. Meanwhile, the US administration appears willing to pressure the EU by imposing tariffs on EU products, which would target a total of up to $25 billion from current list initiated in April amid continued disagreement on aerospace government funding. On a side note, Italian government appears willing to comply with EU Commission 2.04% GDP deficit target in order to avoid a multi-billion fine from the EU. An assessment by the Commission in order to decide whether disciplinary action should be implemented should take place this week.
Recent headlines should therefore turn negative for the single currency. We expect EUR/USD to head along 1.1275 short-term.
RBA cut preps AUD for rally
The Reserve Bank of Australia (RBA) reduced its official Cash rate (OCR) by 25bp taking the policy rate down to a low of 1.00%. Expectations for the move were balanced as Governor Lowe was worried about labor market developments, soft consumption, weak inflation outlook, and macro headwinds. The accompanying statement left the door open for additional easing “if needed”. The dovish statement suggest the status of labor markets (spillover into household consumption) will be critical in the direction of policy rates. Interestingly, pricing of a rate cut in the coming month fell rapidly after the statement. We suspect that a majority of downside global growth risk is already priced in indicating that its unlikely further easing is necessary. The RBA is likely to pause to allow for the transmission of policy to work through the broader economy. Despite the hype of potential QE we doubt that is really on the table baring an extreme idiosyncratic event. The minutes of today’s meeting will be released on 16th July providing further insight into the board’s mindset. Relative AU-US real yields differential and AUDUSD are constantly correlated. We are now constructive on AUDUSD as Australian rates have seemingly hit bottom and positioning in AUD is overly short. AUDUSD is still facing solid resistance at 0.7036 (100d MA), the break should trigger extension of bullish rally to 0.7201.
