- Drop in US manufacturing figures highlights current vulnerability in strong dollar/weak global outlook environment
- Australia: As expected, RBA cuts cash rate - most of which was already priced in. Although Aussie now has downside potential on paper, investor hunger for yields may mitigate any fall.
- New Zealand: Improved inflation expectations should fuel RBNZ’s conviction to deliver another cut in August
- Equities: European shares likely to follow negative lead from Asia
The US dollar had a quiet start into the week yesterday in spite of lacklustre data from the manufacturing sector. The dollar index has been trading within a narrow range (between 95.50 and 95.85) since Monday when US Markit manufacturing came in flat and matched the median forecast of 52.9, while ISM manufacturing edged lower to 52.6 in July (53 consensus and 53.2 previous reading). This decline can be explained by a drop in certain subcomponents such as employment (49.4 versus 50.4 in June) and a backlog of orders (48.0 versus 52.5 previous). Overall, the report was not completely grim, but did however clearly show that the manufacturing sector remains vulnerable against the backdrop of strong dollar and weak global outlook. EUR/USD is still stuck below the 1.1155 - 1.1186 resistance area (50dma and high from July 5th) as investors await the negative impact of the Brexit vote to kick in.
Early this morning, the Reserve Bank of Australia cut its cash rate target by 25bps to 1.50%. This proved no real surprise as the move was widely anticipated by market participants. Initially, AUD/USD dropped to 0.7491 before bouncing back to 0.7540 as most of the rate cut was already priced in. The Aussie has therefore substantial downside potential on paper; however the globally low environment may mitigate the Aussie fall as investors continue their desperate seek for yields. AUD/USD is trading with a negative bias at around 0.7545. A first resistance can be found at around 0.7450, then 0.7286 (low from June 16th).
The Kiwi rose 0.63% against the greenback on Tuesday after 2-year ahead inflation expectations ticked up slightly, according to the latest RBNZ survey. Expectations rose to 1.65% from 1.64% in the second quarter, slightly higher than the 1.63% record low of the March quarter. All in all, this should fuel the RBNZ’s conviction to deliver another rate cut at its August meeting. NZD/USD tested 0.7218 during the early European session and continued to push higher. On the upside, a resistance can be found at 0.7325 (high from July 12th), while on the downside, the low from yesterday at 0.7163 should act as support.
In the equity market, European shares will likely follow the negative lead from Asia. Most Asian regional markets were trading in negative territory with the exception of mainland Chinese shares.
The Nikkei was down 1.47%, while the Shanghai Composite rose 0.35%. European futures are blinking red across the screen, while those in the US are trading slightly higher overall.