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August 2016

RBA rate cut a possibility

Published: Monday 01 August 2016

  • Sterling drops on poor manufacturing PMI
  • BOE stimulus expected on Thursday
  • RBA rate cut a possibility
  • US employment report on Friday watched by Fed
To everyone who took part in the Ride London event at the weekend, well done. 100 miles on a bike is not for the faint hearted and certainly not for the thin-panted. As much wadding between you and the saddle as possible is the best plan in my humble opinion.
 
The Reserve Bank of Australia has made it clear that they are contemplating a rate cut on Tuesday and many analysts see a 25 basis points cut as almost inevitable but recent data has been a little more buoyant than had been expected. So there is a potential for the RBA to pause for thought and that would immediately strengthen the Australian Dollar. However, this morning’s data shows the RBA’s dilemma very neatly. Inflation dropped to 1.0%; that would provide a perfect opportunity to cut rates but new home sales were up by 8.2%. So the RBA may believe a rate cut would overheat the property market and that is a bad thing, Tomorrow’s Australian building permits data is also expected to be upbeat. Decisions decisions.
 
The Bank of England is expected to reveal a broad range of monetary stimulus packages this Thursday, designed to avoid the worst of the post-Brexit problems. However, apart from survey based sentiment data, the UK hard data has been rather more upbeat than most had forecast and inward investment as well as M&A activity would lead you to suspect that no further stimulus is needed. That said, this morning’s manufacturing PMI index was poor and the Pound sold off as a result. Undoubtedly the Pound will be volatile this week; probably weakening ahead of the Thursday BOE decision and then reacting to the actual event.
 
Before all that though, we have to get Monday out of the way. It is a Monday with literally, some data. It started a drop below the neutral 50 level in Chinese manufacturing sentiment. The Purchasing Managers Index published by NBS came in at 49.9 but that is enough to send shivers through China’s Asian and Australasian suppliers. It didn’t however, weaken those currencies too much.
 
There is plenty of other data this week but the big ones are those mentioned above and the Canadian and US employment reports due on Friday. The US data is undoubtedly most important, in that it will have some influence on whether the Federal reserve is pushed towards further delays in interest rate hikes. They hinted alongside their ‘on hold’ decision in July that a hike might happen this year but strong employment data is a key factor to that decision, so the non-farm payroll count has become important again.
 
And I don’t know if you saw it but Luke Aikins has to win the nutter of the week award for last week. He jumped out of an aeroplane at 25,000 feet (4.73 miles) above the earth and fell without a parachute all the way down before landing in a net strung 20 stories above the ground with pinpoint accuracy and without breaking a bone. Serious bravery ….and excellent planning I guess.
 
 
First jump priorities
 
18 year old Jake tries skydiving for the first time through a company that takes you out on a tandem jump. It all goes wrong when the chute is deployed and they hit the ground with a thud. Jake wakes up in a very bright place with St Peter introducing himself.
 
The Student asks where he is and St Peter breaks the bad news that he has died and is now in heaven.
 
“This is no good,” says Jake. “I need to get back now!”
 
“That’s not possible,” says St Peter. “There is no return possible. This is for eternity.”
 
“Then you had better have good Wi-Fi,” says Jake.
 
“There is no internet in heaven,” says St Peter
 
“Then how the hell am I going to leave that parachute company a 1 star Tip Advisor review and update Facebook?” says Jake. 

FX Research by David Johnson

Daily Currency Analysis with Chris Verdet