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Financial markets hesitate as uncertainty weighs, RBA keeps its cash rate at 1.75%

Swissquote Bank

- A broad-based sell-off indicates that investors are pocketing profits

- RBA left its cash rate target unchanged at a record low of 1,75% as the central bank prepares instead to cut rates at its next meeting (27th July)

- AUDUSD pair more likely to trade between 0.73-0.76 before next CPI report

- Australia could lose its triple-A rating amid growing concerns that the new government may not be able to decrease debt

- Nonetheless most of these possibilities are already priced in so we should see continued strengthening of the Aussie

Overall, risk sentiment has improved substantially since June 24th, although risky assets are still lagging behind. Indeed, the Brexit vote cast a massive shadow over the global outlook leaving investors wondering what the next equity booster will be. Equity recovery was patchy: US equities have already erased post-Brexit losses, while EM equity indices have made some substantial gains due to the prospect of a longer period of low US interest rates, however European indices are struggling to get to get back to their pre-Brexit levels amid continuing uncertainty about the future of the European Union.

On Tuesday, almost all financial assets were trading in negative territory: gold fell 0.55%, silver dropped 1.85% and the West Texas Intermediate slid 1.65%, while Asian regional equity indices blinked red across the screen. This broad-based sell-off suggests that investors are now taking their profits home. Among the G10 complex, the Japanese yen was the sole currency that was able to extend gains against the US dollar. USD/JPY fell 0.60% and hit 101.88 in Tokyo before consolidating at around 102. Since the Brexit vote, the currency pair has traded sideways between 101.40 and 103.40 as the demand for safe haven assets remained strong.

In Australia, the Reserve Bank left the cash rate target unchanged at a record low of 1.75% amid political uncertainty. The central bank is willing to keep some fire power ahead of the next inflation report due on July 27th. Indeed, in the event of renewed downside pressure on inflation, the RBA will most likely provide another cut in the benchmark rate. On the data side, retail sales missed the median forecast of +0.3%m/m and printed at +0.2% in May, up from +0.1% in the previous month. May’s trade deficit printed at AU$2.2bn versus AU$1.7bn as expected; however the trend continues to point towards further improvement. AUD/USD fell 0.46% in Sydney to $0.75. All in all, the Aussie is trading with a positive momentum but has yet to recover from the 4.5% drop of June 24th. The mounting probability of further cuts from the RBA will prevent AUD/USD from gaining momentum and the currency will most likely trade sideways between 0.73-0.76 ahead of the next CPI report.

Yann Quelenn, market analyst: RBA keeps its cash rate at 1.75%: Financial markets widely expected the Reserve Bank of Australia to keep its cash rate at 1.75%. The RBA’s decision is among the first to come from central banks since the Brexit vote and due to the unknown consequences of the referendum, the RBA decided to remain on hold. Yet, we should take note of the fact that precious metals have surged to levels unseen over the last two years.

A rate cut is now looking very likely (probability 50%+) at the next RBA meeting in August, as calculated on the basis of Australian Cash Rate Futures. The Australian GDP still looks decent, Q1 GDP printed at a solid 1.1% q/q, while on an annualised basis, the GDP is hitting 3.8% y/y. The main concern remains the inflation outlook and the greater demand for Aussie which could weigh on the economy and pave the way for further easing.

In the short-term, political worries abound. The Australian federal election’s outcome, which will determine all 226 members of the Parliament of Australia - is very uncertain at the moment as no party has won enough seats. The country could stand to lose its triple-A rating as there are concerns that the new government would not be able to decrease debt.

Nonetheless, most of these possibilities are already priced in, or in our view, largely overestimated (elections) and as a result we should see continued strengthening in store for the Aussie. Furthermore, we reaffirm our bearish outlook on the dollar, which may trigger deeper rate cuts by the RBA.” ---

In the equity complex, the Nikkei fell 0.67%, while the broader Topix index slid 0.42%. In mainland China, the CSI 300 treaded water, edging up 0.02%, while offshore, the Hang Seng fell 0.78% and the Taiex -0.51%. In Europe, equity futures are trading broadly lower with the DAX down -0.35%, the CAC -0.19%, the SMI -0.14%, while the Footsie is flat.

Today traders will be watching Services and Composites PMI from Spain, Italy, Russia, France, Germany, the Euro zone, the UK and Brazil; factory orders and durable goods orders from the US. On the central bank side: BoE’s Carney, Fed’s Dudley and ECB’s Lautenschlaeger will speak.

Source: https://swissquote-fx.com/en/research-and-analysis/
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