Daily analysis | 05 September 2017
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The RBA kept its policy unchanged today, as was widely anticipated. The statement accompanying the decision was little changed from the previous one, with the Bank remaining content with strong employment growth, but maintaining its view that the weakness in wages is likely to continue for a while yet. As for the all-important AUD, officials repeated that the higher exchange rate is expected to contribute to subdued price pressures and that it is weighing on the outlook for output and employment.
AUD/USD traded somewhat lower on the decision after it hit resistance slightly below the psychological barrier of 0.8000 (R1). The rate remains within the sideways range it’s been trading since the beginning of August, between that hurdle and the key support zone of 0.7800, and thus we maintain the view that the short-term outlook is flat for now. A decisive close above 0.8000 (R1) is needed to change the short-term bias to cautiously positive. Such a break may set the stage for extensions towards our next resistance of 0.8070 (R2), defined by the peak of the 27th of July. On the downside, a dip below 0.7940 (S1) could confirm the recent rejection from near the key obstacle of 0.8000 and may trigger further declines within the aforementioned range, perhaps towards our next support of 0.7880 (S1).
As for the bigger picture, although the Bank continues t to express its discomfort with regards to Aussie’s strength over recent months, we stick to our guns that the broader outlook remains somewhat positive. The rate continues to trade above 0.7800, the upper bound of the long-term wide sideways range that had been containing the price action since the 2nd of March 2016. However, as we already noted, we would like to see a strong break above 0.8000 (R1) before we get confident on larger bullish extensions. Focus for Aussie traders now turns to Australia’s GDP data for Q2 due out during the Asia morning Wednesday. Expectations are for the nation’s growth rate to have risen notably, something that may be the catalyst for the aforementioned break.
Yen gains further on fresh North Korea headlines
The yen came under renewed buying interest overnight, following reports that North Korea has been seen moving a ballistic missile towards its west coast, where the nation’s missile launch facilities are. The reports come on the heels of Sunday’s nuclear test and also suggest that there is high likelihood North Korea will fire a missile as soon as September 9th, when the country celebrates its foundation day.
As we noted yesterday, the situation seems to be escalating, but we still believe that investors are not anticipating a military conflict yet. If this was the case, the magnitude of the market’s risk-off reactions would be much larger in our view. In any case, we will continue to monitor related headlines, as developments that increase concerns over the situation may lead to more risk-averse responses.
USD/JPY tumbled on the fresh North Korea headlines, falling below the support (now turned into resistance) barrier of 109.40 (R1). The pair continues to trade within the sideways range that’s been in place since the 28th of July, between the key support of 108.70 (S2) and the resistance of 111.00. Thus, although the pair may continue lower for a while, we consider the short-term outlook to still be neutral. We would like to see a decisive close below 108.70 (S2) before we arrive the conclusion that the picture has turned somewhat negative.
As for today’s events:
We start the day with the final services and composite PMIs for August from several European nations and the Eurozone as a whole. As usual, the final prints are expected to confirm the preliminary estimates. Eurozone’s retail sales for July are also coming out and expectations are for sales to have declined fractionally after rising somewhat the previous month.
We get services PMI data for August from the UK as well. Expectations are for the index to have declined somewhat, but to remain decently above the critical 50 barrier that separates expansion from contraction. In any case, we don’t expect this piece of data to affect the BoE’s policy plans. Back in June Governor Carney made it clear that any near-term hike would likely depend on a pickup in wages and business investment. Given that wage growth has shown little signs of firming, and that the latest investment prints for Q2 were stagnant in both quarterly and yearly terms, we doubt that any rate hike is looming.
In the US, factory orders for July are coming out and expectations are for a notable slide after a decent increase in the previous month.
As for the speakers, besides delivering the RBA statement, Governor Philip Lowe is scheduled to speak during the European morning, where he may elaborate on the Bank’s outlook. Minneapolis Fed President Neel Kashkari and Fed Board Governor Lael Brainard will also speak.