AUD falls as Lowe hints at more easing, Wall St hits new highs

Summary:

• Australian dollar comes under pressure after remarks from RBA Governor Lowe
• Wall Street (SP500 and NASDAQ) hits new highs, Facebook earnings beat expectations
• Steven Mnuchin says a strong dollar is good for the US economy in the long-term

Lower for longer

The Aussie dollar is among the weakest performing major currencies for the second day in a row, after the Reserve Bank of Australia Governor Philip Lowe implicitly hinted at more monetary easing. During his speech is Sydney Lowe said that he was ready to ease policy further if his recent back-to-back cuts failed to revive economic growth. He also signalled that the current environment of low interest rates could stay with us for longer. In terms of changes to the RBA’s inflation objective Lowe was sceptical saying that evidence does not support a change of the bank’s 2-3% inflation goal. RBA’s Governor added that shifting the goalposts could also entrench a low-inflation mindset. Let us remind that some market observers suggested the RBA could make such a step due to the fact that it keeps one of the highest inflation targets among developed economies. Elaborating on the backdrop for price growth Lowe underlined that it was certainly possible that demand would be strong enough to lift inflation in a reasonable timeframe. It is also interesting why, in the eyes of the RBA, inflation is stubbornly low. Namely, in its forecasts in mid-2017 the Australian central bank assumed the steady labour force participation rate (it consists of employees as well as those who look for a job) expecting that some additional workers, encouraged by the very well labour market conditions, will be offset by ageing population. Nevertheless, it has taken the RBA off guard as this rate has increased by one percentage point since then, hitting its all-time high. Therefore, it may have put downward pressure on prices via subdued wage growth there. Either way, after the Lowe’s speech market-based expectations suggest more than 80% chance for a rate cut by the year-end.

The Aussie dollar is steadily moving down after bouncing off the 200DMA. Source: xStation5

New highs 

Meanwhile, Wall Street - SP500 and NASDAQ - hit its new all-time highs on Wednesday. The former gained 0.5% while the latter added almost 0.9% being supported by a rally in chip stocks. We also got some earnings for the second quarter. First of all, Facebook reported EPS of $1.99, while the consensus had called for $1.88, the company’s revenue totalled $16.9 billion, the consensus had pointed to $16.5 billion. The other company, Ford, showed slightly lower than estimated EPS, however, its revenue topped expectations. Finally, Tesla reported a substantial loss another quarter in a row resulting in EPS of -$1.22, the consensus had pointed to -$0.31. Let us also remind that the Federal Trade Commission announced yesterday a $5 billion settlement with Facebook, ending an investigation into how the company lost control over personal data and sent up to 87 million users’ information to the political analysis firm Cambridge Analytica. The stock finished yesterday’s trading 1.1% higher.

The SP500 broke through its past highs on Wednesday, hitting a new record level. Source: xStation5

In the other news:

• Former Fed Chairman Alan Greenspan endorsed a Fed rate cut to counter risks to the economic outlook, even if the probability of the worst happening was relatively low

• The South Korean economy expanded 1.1% QoQ in the second quarter, above the median estimate of a 0.9% QoQ rise

• Mnuchin said that a strong dollar is good for the US economy in the long-term, he added he would not advocate for a weak-dollar policy in the near-term