Aussie slides as RBA discusess rate cut scenario

Summary:

• Australian dollar leads the losses in early European trading following the RBA minutes
• Fed’s Rosengren thinks the US jobless rate could still decline because the pace of growth in economic activity remains sufficient
• Chinese stocks continue benefiting from an improvement in market risk sentiment

RBA strikes dovishness

Over the course of the recent months a lot has changed in terms of monetary policy conducted by major central banks. From mulling over further rate rises (the Federal Reserve) or the start of monetary normalization (e.g. the ECB), a majority of them have switched to a more easing bias trying to revive economic and inflation price growth. The Reserve Bank of Australia was also found in that group and currently the market-based probability implies that a rate cut could arise before the year-end. Interest rate market traders raised the stakes following the RBA minutes revealed overnight. The document showed that RBA members had discussed a possible rate cut during the meeting held at the beginning of this month. The minutes said that a rate cut would be appropriate if inflation stayed low, unemployment trended up. Simultaneously, the account underlined that given subdued inflation, the likelihood of a near-term rise in rates was low. As a result, the probability for a rate cut by the year-end increased to almost 75% from below 70% yesterday. The Aussie dollar has also slid and it is trading 0.3% lower against the US dollar in early European trading - by far the worst performing major currency. Apart from the mentioned comments, the account admitted that the board saw inflation likely to remain muted for some time. On top of that, RBA members claimed that the economy would be supported via lower exchange rate and reduced interest payments on loans - such the effect could be reached by cutting rates. To sum up, there is a high bar for any tighter monetary policy in Australia in the foreseeable future and this should not change even if economic activity in China improves to some extent over the next couple of months.

The AUDNZD cross is trading close to the important technical level. Taking into account the dovish RBA minutes one may suppose that bulls may want to book their gains exerting downward pressure on the cross. Source: xStation5

US labour market yet more tighter?

Although the US labour market has tightened significantly over the recent quarters, it has yet to exert more notable upward pressure on wage growth and thereby domestic price growth. This is the phenomenon many economists and central bankers are focusing on. Nevertheless, if the Phillips curve has not died, the relationship between the labour market and inflation trends ought to result in higher inflationary pressures almost all around the world. What could be interesting, Fed’s Rosengren thinks that despite some deceleration from last year, the pace of growth in economic activity will be enough to bring further reductions in the unemployment rate. His notion seems to deserve attention due to widespread concerns about a global economic slowdown or even major downturn. However, while inflation expectations could drive a bit higher in the near-term owing to receding odds with regard to the impending recession (yields should drive up), they are unlikely to rise sharply and economic activity (globally) is also unlikely to be as good as over the last year. Therefore, the issue of inflation overshooting should not be a material problem for global central banks.

Chinese stocks are driving higher today still benefiting from improved risk sentiment. The Hang Seng (CHNComp) is up 1.2% at the time of writing and it is struggling subtly below the crucial resistance of 11800 points. Source: xStation5

In the other news:

• German foreign minister said there would be no Brexit extension beyond October

• RBNZ’s Orr said the NZ dollar was currently around “happy space”, RBNZ easing bias was likely to remain in place