RBA’s Lowe prepared to ease further
In a speech titled ‘Inflation Targeting and Economic Welfare’ late this morning, RBA Governor Lowe said that he would be willing to ease policy further if needed, adding that no rate hike would be considered until inflation is within the intended target range, which could be some time. He said it was reasonable to expect an ‘extended period’ of low rates.
AUD/USD slid to the lowest level in two weeks after the comments, while AUD/JPY hit the lowest since July 11. AUD/USD is approaching the 55-day moving average at 0.6957.
AUD/USD Daily Chart
Equities continue higher
Asia carried on where America left off yesterday by pushing US indices either to, or close to, record levels. Wall Street indices rose between 0.11% and 0.15% with the SPX500 index climbing to within a whisker of a new record high. China shares gained 0.58% and even Hong Kong shares managed a 0.14% advance.
Currency markets were more mixed, with the Euro still feeling downward pressure ahead of the ECB rate meeting later today. EUR/USD fell 0.04% to 1.1134 and is approaching the April/May lows of 1.1111 and 1.1107, respectively. AUD/USD slid 0.14% to 0.6967 after Lowe’s comments (see below) while GBP/USD slid 0.09% to 1.2472.
EUR/USD Daily Chart
Will they or won’t they?
The major event today is undoubtedly the ECB rate meeting, with most believing the statement and subsequent press conference will contain a dovish bias. The only uncertainty is whether the Bank will actually trim rates today or at the September meeting. According to Bloomberg calculations, market pricing implies a 39% probability of a 10bps cut today which, while not high enough to almost guarantee a cut, is still relatively high. Looking at the September meeting, the odds jump to 62% for a 10bps cut. Bear in mind that Draghi leaves his office at the end of October.
With market positioning invariably bearish ahead of the meeting, there could be a growing tail risk that the level of dovishness displayed by Mr. Draghi and company may not meet these expectations and a sharp reversal of pricing in bond and FX markets could follow. That’s a risk worth taking note of.
German sentiment surveys on tap
Aside from the ECB meeting, Germany has the IFO surveys for July to focus on. The expectations index is seen falling to 94.0 from 94.2, the current assessment index to 100.4 from 100.8 and the business climate index is expected to fall to 97.1 from 97.4. Given the weak performance by the flash PMIs yesterday, the downside for all these readings could be vulnerable.
On the US front, durable goods orders for June are seen rebounding to +0.7% from -1.3% the previous month, while the good trade deficit for the same month is expected to improve to -$72.4 billion from -$75.1 billion.
