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AUD/USD forecast for the week of July 25, 2016
The AUD/USD pair fell significantly during the course of the week, breaking the bottom of a shooting star from the previous market. With this being the case, the market has quite a bit of support below, so I think that short-term sellers will probably be what runs this market more than anything else. With this, if there is any type of supportive bounce, you may get an opportunity to sell again on short-term charts. As far as long-term trading is concerned, I don’t have any real interest in doing so at this point in time.
3 Reasons To Stay Bearish AUD Ahead Of Inflation Data
Ahead of this week’s inflation data, there are three main reasons to stay short AUD, whether against an equally weighted G3 basket or just against EUR, as we recommended last week.
First, an August rate cut still looks underpriced at 60%. Our economists expect core inflation for Q2 at 0.4% q/q and 1.5% y/y. While this is consensus, we believe the RBA’s reaction to such a print will be more dovish than market pricing implies.
Second, after widening in June and early July, the 10Y yield spread to the US has narrowed again to 35bps, implying bond inflows will cease based on the historical relationship.
Third, positioning and valuation still favour shorts. Positioning data from last week’s IMM report, which captures the post-RBA minutes selloff, still show a large extension in net AUD longs. That position is at risk of a rapid reversal if the RBA displays greater urgency in easing than the market expects, especially since longs are concentrated in the leveraged community seeking short-term carry rather than value.
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Reserve Bank of Australia meeting tomorrow - here comes another cut!
Or, maybe the headline should read (spot the difference): Reserve Bank of Australia meeting tomorrow - here comes another cut?
- underlying
measures of annual inflation are the lowest in records going back
thirteen years. The headline rate is 1 per cent, well below the Bank's
target of 2 to 3 per cent
- Employment is growing more slowly than new entrants to the labour force
- (House price) actual increases are less alarming
Link is here for moreRBA Preview: Low Inflation, Strong AUD Put Odds in Favor of Rate Cut
Markets are pricing in a strong chance that the Reserve Bank of Australia (RBA) will make history tomorrow by cutting the cash rate to a record-low 1.5%, in a bid to revive inflation and fast-track an economic recovery amid the mining downturn.
Last week's June-quarter inflation figures were a mixed bag, with core inflation coming in slightly stronger than the RBA expected, but headline inflation slowing to a 17-year low of 1.0%.
Markets were pricing in around 50-60% odds of a 25 basis points cut to the cash rate in August after the inflation data was released on Wednesday, down from 70% ahead of the figures, although most economists remain steadfast in their predictions that the RBA will act on Tuesday.
"Australia’s inflation data for the second quarter provided something for everyone, but the bigger picture is that there is very little price pressure anywhere in the economy," chief Australia economist Paul Dales from Capital Economics said in a note. "This is why we believe the RBA will cut interest rates to 1.5% on Tuesday and why it may also reduce rates to 1.0% next year."
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NAB expects the Reserve Bank of Australia to stay on hold today
"The reason for NAB's view of no change in the cash rate stem primarily from analysis that the RBA's forecasts for growth and inflation will not have materially altered since the Board last met in July, and indeed since the last set of published RBA forecasts, released in May."
The market has continued to price toward the likelihood that the RBA will cut rates again at tomorrow's Board meeting, pricing in this morning a 64% chance of an easing, with 36 of 47 economists surveyed by Reuters on Friday forecasting a cut this week.
NAB continues to expect that the RBA will, after due consideration, agree to leave the cash rate unchanged at 1.75%. Market price reaction will likely be greater in the event the RBA leaves rates on hold.
The reason for NAB's view of no change in the cash rate stem primarily from analysis that the RBA's forecasts for growth and inflation will not have materially altered since the Board last met in July, and indeed since the last set of published RBA forecasts, released in May. Nor are international factors or market conditions suggesting new downside risks. When the Board met last month, the Governor's Media Statement stated that "holding monetary policy steady would be prudent at this meeting ..... (and that) ...... "over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate."
That assessment for growth and inflation, NAB expects, will not have materially altered since the Board last met. Last week's key CPI release for the June quarter revealed headline inflation of 1.0% y/y and underlying inflation of 1½%, inflation predicted in its May Statement on Monetary Policy.
RBA announcement: CUT RATES by 25bp
Reserve Bank of Australia monetary policy announcement
Quick headlines from the statement via Reuters
AUD quickly marked lower and then a bit of a bounce back - currently around 0.7517
Australia - Services PMI (July): 53.9 (prior 51.3)
Australian industry Group Performance of Service Index
Aussie Rises Despite Miserable Retail Sales
The AUD/USD pair was trading near daily highs during the morning session, seen around $0.7620 and 0.40% stronger on the day.
During the Asian session, Australian retail sales for June failed to meet expectations and printed only 0.1% month-on-month, down from 0.2% booked previously.
This data followed a set of weaker economic numbers from Tuesday, when building approvals came out below market estimates and stayed deep in negative territory, while the trade deficit also widened notably in June.
In addition, the Reserve Bank of Australia (RBA) cut the key interest rate by 25 basis points to a record low of 1.50%, which was greeted by a 1.5% rally in the AUD/USD pair.
Furthermore, according to ANZ: "Former RBA board member John Edwards said on ABC TV that the RBA has a huge amount more it could do, including buying bonds, mortgage bonds, intervening in the AUD, and moving to negative rates."
Nevertheless, the aussie decided to ignore all the negative news and just kept on rising, jumping above $0.76 again.
There are no major US data on the agenda today, apart from jobless claims and factory orders, with traders slowly turning their attention to Friday's labor market data.
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AUD/NZD: Complete Correction Confirmed; Bullish Signal Targeting 1.08/1.10
NAB Techs flags a bullish technical signal for AUD/NZD after Wednesday’s NY close above 1.0557, which according to NAB, completes a bullish three-day price pattern and confirms a complete correction targeting pric a shift higher into the 1.08/1.10 range with risk to 1.1250/1.1350 as further bullish confirmation.
"MT momentum bias has shifted to positive confirming the impulsive positive shift in price. ST momentum has shifted to negative in the last 2 weeks as price corrects lower. We would like to see a positive shift in ST momentum to confirm the next upswing.
LT momentum (RSI) remains below an eight-year trend line that must ultimately be broken before we consider that a material LT uptrend is in play," NAB adds.RBA: Underlying inflation to remain under 2% for much of forecast period
Reserve Bank of Australia Statement on Monetary Policy
RBA quarterly statement repeats policy easing to help foster growth, offers no forward guidance
Underlying inflation to remain under 2 pct for much of forecast period, reach 2 pct by end 2018
Prospects for economy positive, but low inflation allows for "even stronger growth"
Judged risks associated with rising house prices and debt had diminished
Says AUD remains significant source of uncertainty for inflation, growth forecasts
Economic growth and inflation forecasts little changed overall
Forecasts underlying inflation 1.5 pct by end 2016, 1.5-2.5 pct end 2017, 1.5-2.5 pct end 2018
Forecasts gdp growth 2.5-3.5 pct end 2016, 2.5-3.5 pct end 2017, 3-4 pct end 2018
Says unemployment to fall only a little out to 2018, employment growth to be modest this year
Drag on gdp from falling mining investment looks to have peaked, non-mining still subdued
Dwelling investment to stay strong for next year or so, but raises risk of oversupply
GDP growth looks to have moderated in q2 as net exports added less
Says wage growth expected to remain low, rise modestly out to 2018
Increasing supply, china steel cutbacks to put downward pressure on iron ore prices
Growth in china expected to slow gradually over next few years, housing a risk
Brexit to have limited effect on Australia's major trading partners