RBA Set To Raise Rates Again Today

AUD

The Aussie Dollar has shown some fight against its counterparts overnight as the prospects of greater trade relations between the east and the west boosted risk sentiment. Asian equities were mixed on Monday with the Nikkei +0.8% while the Hang Seng fell -0.1%. The ASX closed +1.1% higher, driven by gains in energy and real estate. In commodities, Gold gained 0.3%, Silver gained 0.6%, Copper lost -1%, but the star performer was Iron Ore gaining 2.8%. The RBA is set to meet today at 2:30pm AEST, with economists expecting the interest rate to be hiked up for the third time in a row. The major question is whether the official cash rate will rise to 1.1 or 1.35. “The RBA has indicated that a 0.25 or a 0.5 increase is on the table – we think they’ll probably go with the 0.5 which will bring the cash rate to 1.35 from 0.85.” Dr Shane Oliver, chief economist at AMP said. The logic is simply that the economy is currently quite strong with unemployment down and the inflation rate at 5 per cent and still rising. As the economy continues to recover from the economic consequences of the Covid-19 pandemic, the economic impacts of the war in Ukraine, the NSW-Queensland floods and the current energy crisis continue to drive inflation rates up forcing the RBA to match that with upward trending interest rates. Looking ahead, a quiet week of economic data for Australia.

USD

AUDUSD performed strongly overnight, hitting 4-day highs of 0.6888 before floating back down to trade at 0.6869 this morning. The US stock markets performed well yesterday, with the Dow Jones gaining 1%, the S&P 500 gaining 1.1%, and the NASDAQ gaining 0.9%. It is reported that US President Biden may announce a decision later this week to cut Chinese tariffs in an effort to fight inflation, with the move providing a much-needed boost to risk sentiment and the aforementioned Iron Ore prices. Against the backdrop of the recent sharp decline in the US Treasury bond yields, signs of stability in the financial markets acted as a headwind for the safe-haven US dollar. This, in turn, was seen as a key factor that extended some support to the risk-sensitive Aussie. Apart from this, some repositioning trade ahead of the Reserve Bank of Australia policy meeting today prompted traders to lighten their bearish bets around the AUDUSD pair. Looking ahead a busy week for the US in economic data. Thursday will see JOLTS Job Openings, ISM Services PMI, FOMC Meeting Minutes, ADP Non-Farm Employment Change and Unemployment Claims all released.

EUR

AUDEUR reversed the weekends downward trend and touched a 4-day peak of 0.6585, trading around that same mark this morning as positivity sways currency markets. European equity markets were a little mixed at the close with the CAC closing up +0.4% though the DAX was -0.3% weaker on the day. Euro-area May PPI came in slightly below expectations, rising 0.7% m/m (consensus +0.9%) and 36.3% y/y (+36.6%). The ECB said they are to tilt corporate bond holdings to reflect climate risk. The ECB’s Vasle said there will likely be more hikes in 4Q after September. Investors are expecting a rate hike announcement by the European Central Bank (ECB) in its July monetary policy. The odds of a rate hike by the ECB are soaring as escalating price pressures are compelling to halt the accommodative stance and turn to policy tightening measures aggressively. Higher price pressures have resulted in a very large real income shock for the households in Europe. Therefore, the roaring inflation is highly needed to be tamed by featuring rate hikes. It is worth noting that the ECB has not elevated its interest rates in the past 11 years. Now, the Russia-Ukraine crisis and supply chain bottlenecks have accelerated the oil and food prices and the ECB is left with no other option than to raise interest rates. Looking ahead, EU Economic Forecasts will be released on Wednesday.

GBP

AUDGBP performed healthily, reaching 4-day highs of 0.5678, trickling back down to trade at 0.5670 at time of writing. The FTSE had healthy gains yesterday, posting at +0.9%. Brexit jitters are back in the headlines once the UK wants to break the Brexit deal agreed with the EU two years ago. Meanwhile, expectations of the Bank of England hiking rates aggressively eased the tone for the August 4 meeting. The odds of a 50 bps rate hike lie at 65% vs. 75% in the last week, and expectations for the subsequent meetings were lowered, as shown by STIR’s money market futures. The BoE publishes its semi-annual Financial Stability Report tonight, with multiple speakers later in the week will also help to refine expectations for BoE tightening over the next few meetings. Data-wise, in the week ahead, the UK economic docket will feature S&P Global/CIPS UK Services and Composite PMIs for June, alongside the Financial Stability Report. Also, the Bank of England (BoE) Governor, Andrew Bailey, will cross news wires.

NZD

AUDNZD performed valiantly, reaching 1.1064 highs, trading around the highs this morning. In data, NZIER Business Confidence printed at -65, whilst ANZ Commodity Prices m/m will be released at 11am this morning. Tomorrow will see the RBNZ Statement of Intent, its tentative delivery being delayed from the previous week.