AUD little changed post RBA, Conte’s govt set for confidence vote

Summary:

• RBA leaves rates unchanged in line with expectations, dovish lines still included
• Chinese services PMI matches expectations in May
• Spanish IBEX (SPA35) failed to break above its crucial resistance on Monday, a new Italian government is set for a vote of confidence today

We were not offered any price moves of note during Asian hours trading, but several PMIs were released. Before we analyse soft indicators coming from China, Japan and Australia let us begin with the Reserve Bank of Australia’s statement. The bank left rates on hold as broadly anticipated, and did put the same dovish phrases into the communique implying no one should expect imminent rates hikes. The most important headlines are as follows:

• level of interest rates continue to support the Australian economy
• it expects economic growth to pick up to average above 3% in 2018, 2019
• inflation likely to remain low for some time
• wage growth appears to have troughed, but remains low, and it stay there for a while yet
• appreciating AUD would be expected to result in a slowed pick-up in both in the economy and inflation
• a major source of uncertainty remains household consumption
• some concerns about a direction of international trade policy in the US as well as developments in a few emerging markets

As one may notice the bank remains stubbornly dovish in its rhetoric underscoring a need for stable rates in the foreseeable future. A remark with regard to a possible trough in wage growth could be encouraging, albeit it should be taken with a grain of salt as what we have here are just conjectures of the RBA members. Either way, the Australian dollar weakened substantially since February, hence one should be prepared for a possible pullback once the US dollar resumes struggling. Let us also recall our premium analysis of the AUDNZD cross we produced some time ago. Since then the cross has slipped to the level we pointed as a possibly good entry point, and has rebounded thereafter. Therefore, as long as the pair keeps trading above 1.08 one may hold out hope for a bounce toward 1.1050 or so.

The AUDNZD cross bounced off its relevant support area giving hope for a larger corrective move to the upside. Source: xStation5

Notice that the AUD got quite a solid data in terms of services PMIs (both AIG and CBA/Markit readings marked substantial improvements compared to their prior values). On the flip side, the Australian balance of payments missed expectations coming in at -10.5 billion AUD (vs. -9.9 billion expected), and the prior quarter was revised down from -14 billion to -14.7 billion. Finally, another partial data regarding first quarter GDP growth (it comes out tomorrow) pointed that net exports ought to add 0.3% to growth, it is less than anticipated (0.5%). By and large, the GDP release could be crucial for the AUD especially in terms of consumption as the RBA keeps highlighting this as a major source of uncertainty. On top of that, Chinese services Caixin PMI matched expectations and stayed at 52.9 in May which resulted in no change in composite PMI (52.3). Among key points stemming from the release it’s worth noticing that input costs rose at the slightly quicker pace implying that price pressure could build up if this trend turns out to be sustained. Last but not least, Japanese services PMI slid in May to 51 from 52.5 taking the composite gauge down to 51.7 from 53.1. Unlike China there were fresh signs of no inflation in Japan as output price inflation eased despite the quicker rise in costs.

Before today’s session it’s worth keeping a closer eye on the Spanish IBEX (SPA35) as it failed to break 9780 points yesterday reflecting some bulls’ fatigue. Therefore, one we are offered a bearish candlestick today it could be a warning signal for buyers. Anyway, even as political risks in the South Europe have subsided to some extent we still reckon that elevated risk premium in Italian bonds could stay for longer (notice that a vote of confidence for a new government is to take place later today). Source: xStation5