Aussie rallies following RBA rate decision

Summary:

• Reserve Bank of Australia kept rates unchanged and pointed where it would be looking at when judging an appropriate rate level
• US Trade Representative Lighthizer accuses China of reneging on commitments it has made in trade negotiations so far
• Asian equity markets stay calm, NIKKEI declines as Japan is back after a week-long holiday

Aussie benefits from RBA decision

Today’s RBA rate decision was a toss-up with market expectations almost evenly distributed between a cut and an increase in interest rates. Meanwhile, the RBA decided to keep rates unchanged with the main rated staying at 1.5%. The Aussie jumped to its highest level since the beginning of May in the aftermath. The central bank wrote that there was still some spare capacity left in the economy, hence a further improvement in the labour market could be needed for inflation to be consistent with the objective. Therefore, from this point of view it is clear that data coming from this part of the Antipodean economy should be treated with the highest priority for investors. In this regard the bank said that while the labour market remained strong, there was little further progress in reducing unemployment over the past six months. Let us remind that this is the case present not only in Australia but in other parts of the world as well. The bank also cast a shadow on consumer spending suggesting that it constitutes a major source of uncertainty due to a protracted period of low income growth as well as declining housing prices. In terms of the latest price developments the central bank did admit that the first quarter price growth had been noticeably lower than expected. The RBA also presented its new macroeconomic projections for CPI and GDP seeing underlying price growth at 1.75% this year and at 2% in the following year. In turn, the Australian economy is to grow 2.75% in 2019 and 2020. In terms of the exchange rate the bank wrote that it remained at the lower end of its narrow range - if the Aussie continues slipping, it could add upward pressure on inflation in the months to come and thereby it could become an important factor for the RBA. Finally let us notice that the bank sees the outlook for the global economy as reasonable, albeit with risks tilted to the downside. After today’s decision the market-based probability of a rate cut in the coming months has lowered to some extent, however, it still sees almost 70% chance by August.

The AUDUSD jumped immediately following the RBA’s rate decision. However, bulls would have to deal with the major obstacle in the form of 0.7070 once they want to climb even higher. If they fail to do so, then a move toward the lower bound of the channel could be on the cards anew. Source: xStation5

Lighthizer accuses Beijing of reneging on its commitments

On Monday, US Trade Representative Robert Lighthizer accused Beijing of reneging on commitments it made in trade negotiations with Washington. He also confirmed that the Trump administration would lift its tariffs on $200 billion of goods being imported from the world’s second largest economy as soon as this Friday. In turn, Steven Mnuchin, US Treasury Secretary, said that Donald Trump was informed over the weekend that Chinese officials were backtracking on their language being negotiated in recent weeks which was to prompt US President to take appropriate steps. Let us recall that the US plans to increase a tariff rate from 10% to 25% on $200 billion of goods, while $350 billion of Chinese goods being untaxed so far could be slapped with a 10% tariff rate. A Chinese trade delegation is still expected to arrive in the US capital later this week, albeit one day later that it earlier planned (Thursday instead of Wednesday). Following heavy declines on Monday, Asian equity markets are little changed this morning except the Japan's market being down 1.5% after is back after a week-long holiday.

In the other news:

• Australian retail sales for March grew 0.3% MoM, the reading beat expectations of a 0.2% MoM increase; the economy also saw a trade surplus in March of 4949 million AUD while the consensus had called for a surplus of 4480 million AUD

• Japanese manufacturing PMI for April (final) came in at 50.2 compared to a preliminary value of 49.5

• New Zealand’s 1-year inflation expectations for Q2 stayed barely changed (2.01% vs. 2.02% previously)