The RBA should cut rates today and the Aussie should fall down through 1.0200/20 for a double whammy of stimulus for the faltering Australian economy.
Yesterday’s release of retail sales which showed a fall of 0.4% against the +1.3% the previous month and the rise of 0.2% which was expected painted a picture of the weakness that is evident in the economy as the mining boom slows, as the high Aussie Dollar bites into retailing, what’s left of manufacturing, tourism and education and as Australians continue to focus on paying down debt rather than running out to spend. The Australian economy is not what it was, it is not the miracle that many offshore thought it to be and it is not immune from the ill winds of the global economy like many thought.
So the RBA should cut rates and the Aussie dollar should fall – but will they? This is an interesting question, if we the RBA Governor or on the RBA Board we would vote for a cut. Certainly we recognise that there is only so much that monetary policy can do and the traction that rates are having is certainly less than has been the case in the past. But this is the point for the easing – with inflation low and the economy weakening and with the transmission mechanism weakened rates actually need to be cut more not less to get the same result as in the past.
If they do the Aussie will come under pressure but the extent of the selloff is initially likely to be dependent on the words they use if they cut while any bounce if they don’t cut will also rely on the words they use. But the reality is only Blind Freddy can’t see the state of the Australian economy and with the Budgetary position worsening further even if they don’t cut this month they will next.
But they should cut today.
Looking at the charts you can see that the Aussie once again tested support overnight with a low of 1.0217/19 again for the third touch of this zone. If the Aussie trades down through 1.02 the next support is 1.0115/20 but we would expect a run under 1.00 if this 1.02 gives way for a day or two.
In the short term the hourly and 4 hour charts suggest resistance is at 1.0290 with a break needed to get it back into the mid to high 1.03’s.
Elsewhere overnight the weakness in Chinese Services PMI we saw yesterday was mirrored in Europe last night with the German services sector slipping below the 50 level to 49.6 but this was better than the expected 49.2. Retail sales in Europe undershot heavily however printing -2.4% versus -1.9% expected. It is happening all over the world whether it is high unemployment or high debt consumers are under pressure across the globe.
At the close the DAX was 0.13%, the CAC fell 0.15%, stocks in Milan dropped 0.35%, while in Madrid they fell 0.48%. The London market was closed.
In the US the fireworks of Friday gave way to a much more sombre trading day with the Dow finishing down a little at 14,969, the S&P rose 4 pts to 1618 (another closing high) and the Nasdaq was 14 points higher for a rise of 0.43%.
Turning back to FX markets Euro turned lower once again and is trading at 1.3073 this morning. Surely it is going to break lower soon – isn’t it. USDJPY was a little higher threatening to break through the top of the box and take out 100 sometime soon. We always respect the range until it breaks but if 100 gives way as we discussed yesterday in our Commitment of trader report positioning in the Yen is such that a break of 100 could be fuelled by spec’s entering the market.
As is evident USDJPY is in a box but a break is going to be decisive either way. USDJPY tested 97 last week a couple of times and is now looking for resistance. We respect the box/range until it breaks but if it does we’ll be piling in with everyone else.
USDCAD still looks headed toward parity and GBPUSD looks to have formed a range top for the moment as well as you can see below. We are now respecting 1.5633 as the top and taking a short position against this level as a stop.
On commodity markets Nymex crude is up a little to $95.86 Bbl as was Gold which rose to $1469 oz. Silver was 0.24% lower and copper lost 0.5%. In the Ags Corn was pressured by hopes for increased planting falling 2.97% with wheat also falling 2.57% and Soybeans 0.72% lower.
RBA Day today – so be careful in the lead up to and around 2.30 pm Sydney time. We’ll get some interesting lead ins earlier with the House Price Index and Trade data earlier in the day .
Tonight trade data in France and factory orders in Germany will be interesting.