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RBA Holds as Market Panic over a Trade War Abates for now

EUR/USD, AUD/USD, GBP/USD and USD/JPY Daily Outlook – May 24, 2018

Earlier in the Day:

Economic data released through the Asian session this morning was on the lighter side, with data limited to Australia’s January retail sales and 4th quarter current account numbers, which were rolled out ahead of the RBA’s March interest rate decision and rate statement release.

According to the ABS, retail sales increased by just 0.1% in January, falling short of a forecasted 0.4% increase, following December’s even more disappointing 0.5% decline.

Sales of clothing, footwear and personal accessories, down 0.7% and sales at department stores, down 0.6%, dragged on retail sales figures for the month, though other retailing was the only sector that saw a sizeable increase in sales, up 1.0%. Household goods retailing and cafes, restaurants and takeaways both saw just 0.1% increases in the month.

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While the retail sales figures were weak for a 2nd consecutive month, Australia’s 4th quarter current account surplus widened from an upwardly revised A$11.0bn to A$14.0bn, which was better than a forecasted A$12.3bn deficit.

The Aussie Dollar slipped from $0.77793 to $0.77669 immediately after the release of the data, with the better than expected current account surplus easing some of the pain for the Aussie Dollar. The Aussie Dollar weakness didn’t last long, with the Aussie Dollar back through to pre-release $0.78 levels ahead of the RBA interest rate decision and rate statement.

The RBA held rates unchanged at 1.5% as expected this morning, with the markets placing a greater emphasis on the accompanying RBA Rate Statement.

Salient points from this morning’s statement included:

  • While oil and commodity prices have been on the rise, Australia’s trade terms are expected to decline over the next few years.

  • Australian economy to grow faster in 2018 than in 2017, supported by positive business conditions and increased non-mining business investment.

  • Increased public infrastructure investment also supporting the economy.

  • Export growth anticipated following some weakness in 2017.

  • Uncertainty remains over the outlook for household consumption, with household incomes growing slowly amid a high debt level environment.

  • Employment grew strongly in 2017, with forward indicators pointing to continued improvement, while wage growth remains low, which is expected to continue for a while yet, though appears to have bottomed out.

  • Inflation remains low and is likely to remain so for some time yet, weighed by soft wage growth and strong competition in retailing.

  • The central forecast is for CPI inflation to be slightly above 2% in 2018.

  • An appreciating Australian Dollar would be expected to result in a slower pick-up in economic activity and inflation.

  • The low level interest rate environment continues to support the economy, with further progress on reducing unemployment and seeing inflation return to target expected, though this is likely to be gradual.

The Aussie Dollar moved from $0.77842 to $0.77907 upon release of the statement, with the sentiment towards labour market conditions and outlook on wage growth and inflation somewhat more bullish than in prior statements.

Elsewhere, the Japanese Yen was down 0.16% to ¥106.37 against the U.S Dollar, following on from Monday’s 0.43% fall, while the Kiwi Dollar was up 0.19% to $0.7240, the risk on sentiment, pickup in commodity prices on hopes of the U.S pulling back from a trade war supporting risk appetite and the commodity currencies.

In the equity markets, Asia followed the U.S and European equity markets into positive territory in the morning, with all the majors on the move, led by the Nikkei, which was up 2.12% at the time of writing, supported by the softer Yen through the session. The generally more sedate ASX200 was up 1.2% ahead of the close, while the CSI300 and Hang Seng were up 0.24% and 1.26% respectively.

The financial markets fear of a trade war may have eased overnight on Monday, but they are not out of the woods yet, with any execution of tariffs on steel and aluminium expected to take place later in the week.

The Day Ahead:

For the EUR, there are no material stats scheduled for release this morning, which will provide the markets with an opportunity to assess the lie of the land, with political risk in the Eurozone on the rise once more.

Chancellor Merkel had a close call, but pro-EU Establishment Renzi was less fortunate and has found his way out of Italian politics for a 2nd time as the two major populist parties, the Lega Nord and the Five Star Movement, manoeuvre to take the reins in what would certainly be a disaster for the Establishment. Italy has the Eurozone’s 2nd largest manufacturing sector and any decision to begin emigrating migrants and the sector could take a hit, with migrants making up the lion’s share of the work force.

The EUR held up well on Monday, in spite of the political uncertainty, though one wonders how the EUR would hold up should Lega Nord and Five Star Movement form a coalition to run the country in the coming weeks.

At the time of writing, the EUR was up 0.12% to $1.2351, with the EU in the spotlight as Brexit and Italy demonstrate just how negative the sentiment is towards the Establishment.

For the Pound, It’s a quiet day on the economic data front, with February’s BRC Retail Sales Monitor figures the only data released in the early hours of this morning, which was a positive for the Pound, the figures suggesting that retail sales grew at the same pace as in January last month.

The moves in the Pound on Monday were a reminder of the Pound’s sensitivities to progress on Brexit, so this is likely to continue through the week, key areas of focus being a transition deal and trade. It will be interesting to see how the Establishment position themselves in the wake of the Italian election result, with the EU losing a major pro-EU ally on Monday.

At the time of writing, the Pound was down 0.01% to $1.3847, with a sound outcome from Brexit negotiations a must for the BoE to be willing to make a move in the coming months. Economic data has held up well, but the British government will also need to deliver.

Across the Pond, economic data out of the U.S is on the lighter side, with stats limited to January factory orders, forecasted to be Dollar negative. FOMC voting member Dudley is also scheduled to speak later today, though barring a material shift in sentiment towards policy from last Friday, we don’t expect too much of a response.

We will expect the markets continue to look towards the Oval Office to gauge whether Trump will go ahead with the tariffs and extend to other goods and raw materials.

At the time of writing, the Dollar Spot Index was down 0.15% to 89.949, with Dollar having had a choppy session, driven by uncertainty. Will the FED be willing to make a move later this month, if Trump rolls out trade tariffs?

For the Loonie, things have gone from bad to worse. Following a lull, talk of the NAFTA trade agreement being cancelled has resurfaced, with the prospect of tariffs on steel and aluminium a negative for the Canadian Dollar, which is now sitting at C$1.29 levels against the U.S Dollar.

On the data front, key stats out of Canada are limited to February’s Ivey PMI that is forecasted to be Loonie positive, though with the markets now again concerned over NAFTA, the gains may be relatively muted.

The Loonie was down 0.08% to C$1.2974 against the U.S Dollar, with further declines on the cards, particularly when considering the fact that the Bank of Canada will have its hands tied on policy until there is clarity on trade terms with the U.S.

 

This article was originally posted on FX Empire

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