The majority of analysts expect the Reserve Bank of Australia to cut its benchmark interest rate tomorrow by 25bp, to 1.25% from 1.50%. However, and given that expectation, since the back end of last week the AUDUSD has remained relatively firm with the price rebounding this morning above 0.6950 after it managed to hold above 0.6900 on Thursday and Friday.
Certainly, the price is off the lows reached the week before last when it touched 0.6865. Perhaps at that level a potential rate cut was more than priced in anyway and that, in partexplains the rebound over the past couple of sessions, ahead of the RBA policy meeting tomorrow. Moreover, the suggestion is that a sizeable player has been buying the AUD in recent days and that definitely smacks of ‘Reserve reallocation’- no prizes for guessing who that might be of course! So, given that information, it will be interesting to see how the AUD performs tomorrow if the RBA does reduce interest rates.
Meanwhile, elsewhere the equity markets have finally taken a more realistic reaction to what is going on. The falls in the US on Friday weren’t actually as bad as I expected, but nevertheless the S+P still closed below its 200 daily moving average (Currently 2775) for the first time since early March. Naturally, that shouldn’t exactly come as a surprise given the current backdrop. The price looks set to open lower again today with the next level of technical support now residing at 2722.
Further to all that I said last week, I should note that the S+P is continuing to be led by WTI and certainly on Friday the S+P was again the laggard in that relationship. Oil is still under pressure, with the price dropping through $52.50 overnight. Understandably, the main beneficiary of all this is still gold, which has lifted above $1310 in Asian trading today.
The dollar Index rejected another attempt at breaking above 98.40 last week and is leaking lower again today. That’s partly due to the JPY rising, close to its best levels of the YTD with the USDJPY now eyeing 108 this morning as US 10year yields continue to edge lower, currently trading at 2.13% as I write.
So, its the combination of lower UST yields and risk aversionthat are continuing to drive the JPY higher. However, the both the EUR and the GBP are yet to derive any real gains versus the US currency and that’s entirely down to the southbound moves in the EURJPY and GBPJPY, both of which have shed a lot of ground recently. Indeed, the EURJPY in particular is now posting fresh 2 year lows this morning.
Last week the GBPUSD did manage to hold above 1.25 and the subsequent rebound back above 1.2650 as this week gets underway is not necessarily GBP centric as far as I can see. However, right now we are in something of benign spot when it comes to fresh Brexit news and although the reality is increasingly obvious, the respite is allowing the pound toregain some of its recent losses. Perhaps there’s a technical element at play here too, but that’s as far as it goes.
In regards to the GBPEUR, which did drop through 1.13 (to as low as 1.1265) on Friday, that was surely as a result of month end demand for Euros. The price has rebounded, but the upside looks limited for now with 1.14 likely to cap that for the time being.
Data release/event wise this week, beyond the RBA decision tomorrow, the ECB is in the spotlight this week. The focus on Thursday is most likely, not on what the ECB does or doesn’t deliver in terms of a policy change, but as is often the case, more on what Mario Draghi has to say afterwards.  Ahead of that on Thursday, the latest Eurozone CPI data will attract a good deal of attention too.
The only US release of any real note this week is the latest ISM index due later today. The markets will be eying all aspects of that report for further clues on future Fed policy. Whilst there can be no denying that the outlook is deteriorating, it will probably still require evidence of that in the hard data to turn the Fed’s hand. If and when when that does show up then the dollar will balk, but until then its still the best of a bad bunch even with US yields dropping back as they are currently, and certainly until such time as capital flow gets better rewarded for going elsewhere
Important Economic Releases Due This Week
03/06- 3.00pm- US May ISM Manufacturing Index
04/06- 5.30am- Reserve Bank of Australia Monetary Policy Decision
      (Consensus- benchmark rate cut to 1.25% from 1.5%)
04/06- 10.00am- Eurozone May CPI Estimate
05/06- 2.30am- Australia Q1 GDP Estimate
05/06- 9.30am UK May Services PMI Index
06/06- 10.00am Eurozone Final Revision Q1 GDP
06/06- 12.45 ECB Monetary Policy Decision
      (consensus- No Changes to any Benchmark Rates Expected)
06/06- 1.30pm ECB President Mario Draghi Hosts Post ECB
Policy Meeting Press Conference
07/06- 1.30pm Canadian May GDP Estimate