The Reserve Bank of Australia left its cash rate unchanged at +1.50% today. In the statement accompanying the decision, the Bank stated that indicators of the labor market remain mixed. It acknowledged that employment growth has been stronger over recent months, but it expressed concerns with regards to wage growth.
AUD/USD came under selling interest at the time of the release as the bank was not as upbeat as expected following the latest two stellar employment reports. The pair fell after it hit resistance at 0.7680 (R2), to break below the support (now turned into resistance) of 0.7635 (R1). Nevertheless, the slide was stopped by the short-term uptrend line taken from the low of the 2nd of June. In our view, a clear break below that line is needed before we get confident on further downside extensions. Something like that is possible to pave the way for our next support obstacle of 0.7580 (S1).
Looking forward, we expect the Bank to maintain a balanced tone in the months to come and try not to tip the scale in any direction. Given that the quick cuts in 2016 reignited the housing market, we believe that officials will be reluctant to lower rates in coming months as concerns of potential financial stability risks may prevail again. On the other hand, the prospect of an extended period of labor market slack and inflation weakness are far from favoring a hike.
Overall, bearing in mind the latest hawkish signals from several G10 central banks, like the ECB, the BoE, and the BoC, we expect the Aussie to underperform against their respective currencies. We would avoid to exploit any further Aussie weakness against the US dollar, given investors’ expectations that the Fed may not proceed with another rate increase this year. We see EUR/AUD as a better proxy, given that the common currency has been supported by the latest ECB hints that the era of ultra-loose monetary policy is probably behind us.
Riksbank may appear more optimistic this time
During the European day, the central bank torch will be past to the Riksbank. The forecast is for the world’s oldest central bank to remain on hold. At its latest gathering back in April, the Bank extended the duration of its QE program by 6 months to December 2017 and pushed somewhat further out the timing for its first planned rate hike.
A few weeks after that meeting, the Bank announced plans to move away from its strict 2% inflation target and to introduce a target range of 1% from 2%. This implies that policymakers may be more tolerant of subdued inflation, which reduces the likelihood for any further easing measures. What’s more, European political risks have dissipated notably following the French election, something that could be reflected in the meeting statement. The combination of these factors makes us believe that the Bank is likely to appear more optimistic this time. In fact, we would not rule out the prospect that the Riksbank follows in the recent footsteps of the Norges Bank and the ECB, by also removing its interest rate easing bias.
USD/SEK edged north yesterday after it hit support fractionally above 8.4000 (S1). Nevertheless, following the break below 8.6200 (R3), which has been the lower bound of the short-term sideways range that contained the price action from 16th of May until the 27th of June, we see a negative short-term picture. A more-sanguine-than-previously Riksbank today may prove the trigger for another leg down and the continuation of the newborn near-term downtrend. If the Riksbank does not disappoint market expectations, we expect the bears to take charge and aim for another test near 8.4000 (S1). A break below that barrier could set the stage for extensions towards our next support of 8.3370 (S2).
As for the rest of today’s events:
In the UK, the construction PMI for June is due out. Expectations are for the index to have slid to 55.0 from 56.0 in May. The manufacturing PMI for the month fell by more than anticipated, enhancing the case for the construction index to follow suit and perhaps decline by more than it is forecasted. Something like that could pour some cold water on expectations regarding a BoE rate hike at one of the upcoming meetings. From Eurozone, we get PPI data for May and expectations are for the rate to have declined.
Besides the RBA and Riksbank Governors Philip Lowe and Stefan Ingves, we have two more speakers scheduled during the day: ECB Executive Board members Peter Praet and Yves Mersch.
AUD/USD
Support: 0.7580 (S1), 0.7535 (S2), 0.7515 (S3)
Resistance: 0.7635 (R1), 0.7680 (R2), 0.7710 (R3)
USD/SEK
Support: 8.4000 (S1), 8.3370 (S2), 8.2800 (S3)
Resistance: 8.5000 (R1), 8.5500 (R2), 8.6200 (R3)
