Cooling CPI Keeps Fed on Track for Cuts

AUD

The Aussie Dollar was dragged lower by little brother (the NZ Dollar) yesterday after the Reserve Bank of New Zealand lowered their key interest rate from 5.5% to 5.25%, with the NZ central bank revealing Members even considered a 50-bps cut. The AUD and NZD are positively correlated as both economies are closely linked (e.g. we both export similar commodities such as minerals, meat and dairy, which impact the currencies in the same way). Asian equities finished the session mixed, Nikkei +0.6%, Hang Seng -0.4%, and Shenzhen -0.8%. Locally, the ASX closed +0.3%, driven by health care and information technology. Later this morning we will see Aussie employment data, including the Unemployment Rate and Employment Change. The Unemployment Rate is expected to hold steady at 4.1% (it was at 3.8% this time a year ago). We will also see important data from China in the form of Industrial Production and Retail Sales.
 

USD

AUDUSD touched 3-week highs of 0.6643 in yesterday’s session before falling off in the later hours to open today at 0.6598. Wall St. ended mostly in the green with the Dow +0.6%, S&P 500 +0.4% and NASDAQ flat. Last night, US Consumer Price Inflation (CPI) for July landed at 2% m/m with the yearly figure at 2.9% (a touch softer than expected, with little reaction from markets). The data suggests the Federal Reserve remains on track to hit its 2% inflation target, which should allow the central bank to increasingly focus on other issues, such as maximizing US employment in the weakening labour market. A jam-packed night ahead, with Retail Sales, Unemployment Claims, the Empire State Manufacturing Index and Philly Fed Manufacturing Index on the data calendar. After flat growth in June, Retail Sales are forecasted to have risen by +0.4% m/m in July, which may go some way in calming recession fears.
 

EUR

AUDEUR touched 0.6042 in the late morning yesterday before gradually easing to this morning’s open at 1-week lows of 0.5992. The DAX & CAC gained +0.4% and +0.8% respectively. It’s been a very quiet week in terms of Eurozone data. There’s nothing set for release today (It’s also a French and Italian Bank Holiday). Tomorrow evening we’ll see the Eurozone Trade Balance. With 3 more European Central Bank (ECB) meetings before year-end, markets are pricing in approximately 70 bps of interest rate cuts.
 

GBP

AUDGBP made slow and steady declines throughout yesterday’s session, reaching 1-week lows of 0.5123 earlier this morning before pulling back a little to open at 0.5144. Equites were healthy with the FTSE +0.6%. UK CPI fell short of expectations, with the annual figure printing at +2.2%. A sizeable fall in energy prices contributed to the figure. Pairing the weak inflation data with Tuesday’s soft labour report, there’s no doubt Bank of England Members will be more unanimous in their next interest rate decision. This afternoon will bring GDP m/m for the UK, with the headline figure expected flat.
 

NZD

AUDNZD soared over 1.2% in the aftermath of yesterday’s Reserve Bank of New Zealand (RBNZ) interest rate cut. The currency pair traded from 1.0907 lows to 2-week highs of 1.1040 before retracing a little to open today at 1.0997. Yesterday, the RBNZ lowered its Official Cash Rate by 25 bps to 5.25%, with the move surprising economists polled by Bloomberg & Reuters, although approximately 2 in 3 futures markets participants expected the cut. In its release, the RBNZ noted Consumer Price Inflation (CPI) is returning to its target range of 1% to 3, and that although still elevated, services inflation is expected to decline. The central bank then noted the pace of further easing will depend on how confident it is about a low inflation environment. Notably, the central bank even considered cutting by 50 bps. This is likely the cause for the NZD’s significant weakness. No economic data from NZ today. At 9:10am, RBNZ Governor Orr will be discussing yesterday’s Monetary Policy Statement in an interview conducted by Bloomberg TV.

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