The U.S. dollar is softer, but within the recent ranges in rather dull summer activity. With a light U.S. economic calendar, the impetus is coming from elsewhere and the U.S. 10-year yield is seen in a 2.50%-2.75% range.
The Reserve Bank of Australia delivered the widely expected 25 bp rate cut to bring the cash rate to 2.50%. The accompanying statement was not as dovish as some had hoped. This coupled with extended market positioning spurred a "sell the rumor, buy the fact" type of activity and in the short squeeze the Australian dollar moved back to straddle $0.9000. Recall that yesterday it had already staged a bit of a reversal, recovering from a low near $0.8850 to finish in North America near $0.8930. The 0$0.9020 may offer mild resistance, but we expect the bears to make a stronger showing in the $0.9080-$0.9100 area.
The next RBA meeting is September 3, a few days before the election. We never attributed a strong chance of a cut then. However, we still think the RBA has not reached the end of its easing cycle and continue to look for a 25 bp cut in Q4. Several Australian banks wasted no time to fully pass on today's rate cut.
Separately, Australia reported a smaller than expected trade surplus as both imports and exports fell, consistent with a softening economy, though it was the 4th consecutive monthly surplus. The house price index rose more than expected, 2.4% in Q2, more than twice what the consensus expected and after the Q1 increase was revised up to 0.8% from 0.1%. This kind of trend, where lower rates lead to higher asset prices, also poses a challenge to Australian officials. First thing Thursday in Sydney, Australia reports July employment data. It has shed full time jobs in the past 2-months and in 6 of the past 8 months.
The string of favorable U.K. news continues. However, concern about potential bearish implications of the BOE's quarterly inflation report, especially with its forward guidance, is leaving participants unwilling take on sterling exposure. The U.K. has followed news of impressive gains in all three PMI readings (service, manufacturing and construction), it reported gains in house prices (Halifax +0.9%), a five month high in BRC like-for-like retail sales (2.2%) and twice the expected rise in industrial production and manufacturing output for June (1.1% and 1.9% respectively). While the industrial production and manufacturing data is most impressive, it was largely reflected in the recent release of Q2 GDP (0.6%) and the ONS said no revision is implied by the data.
Sterling extended its gains against the dollar, but has not resurfaced above $1.54 to challenge the late July high near $1.5435. The euro slipped to just below $0.8620 before rebounding. Sterling is not drawing as much support from the recent rise in U.K. rates. Over the past week the U.K. 2-year yield has risen 8 bp, the U.S. has slipped 1 bp and Germany 2. The 10-year yield has risen 18 bp, while the U.S. and Germany 10-year yields have risen about 5 bp.
Data from the euro area continues to point to some cyclical improvement. Italy finished the Q2 with two consecutive months with gains in industrial output (0.3% in June after 0.1% in May) and GDP in the quarter fell by 0.2%, half the contraction the market expected.
Separately, German, which reported its construction PMI softened to 51.5 from 54.5, reported a rebound in factory orders in June. The 3.8% increase in June (vs. 1.0% consensus) was coupled with an upward revision in the May series to -0.5% (from -1.3%). This was enough to lift the year-over-year rate back into positive territory (4.3% from -1.18%). It may point to a better number tomorrow when the June industrial output figures are reported.
Even after the data, the euro has remained confined to yesterday's range. And this is within the range set last Wednesday and the FOMC statement ($1.3210-$1.3345). Separately, we note that the U.S.-German 2-year yield, which we find tracks the euro-dollar exchange rate, has continued to trend lower since early July (peak near 28 bp) and near 12 bp today, is the lowest since late June.
The dollar did rally against the yen post-FOMC, but surrendered most of those gains. Last Wednesday's low was near JPY97.60. Today's low is near JPY97.85. In what appears to be a largely recycled story, press reports suggesting that the public employee pension fund may buy local shares helped lift the large cap shares in the Topix and Nikkei (up +0.75% and 1.0%) respectively, but leaving the small cap shares out of favor (JASDAQ -1.0%). The Nikkei tried filling the gap left from last Friday's higher opening initially, when failed to do so completely (gap still exists between 14005.77 and 14031.61) and rebounded smartly to finish on its highs.
In North America, both Canada and the U.S. reports June trade figures. The U.S. data may help shape economists' expectations for revisions to Q2 GDP figures. Before the crisis, Canada used to consistently report trade surpluses, has mostly been reporting deficit since 2009. It has not reported a monthly surplus since December 2011. The trade deficit appears to have fallen in Q2 for the third consecutive quarter. Look for the U.S. dollar to largely trade in a CAD1.0350-CAD1.0400 range, but more inclined to see CAD1.0450 before CAD1.0300.