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This was the final sentence in the last monetary policy statement by the RBA at the start of the month. Most describe it almost like the RBA’s get-out-of-jail-free card; it has managed to provide a glimmer of hope to those that want further easing. The statement’s meaning hasn’t changed since it was added basically at the start of the current rate-cut cycle over 20 months ago in November 2011.
Since the rate cut in May this year, more and more dovish analysts have been crying foul that the RBA has started to jawbone again because inflation is stagnate and the non-mining economy is drowning.
Most of the more dovish analysts expect a rate cut this August, though history would not support this call; the last time the cash rate was cut in August was 1990 and in the 23 years since that time, August has actually had four rate hikes, leaving the remaining 19 unchanged - not fantastic odds.
However, the swaps market is also starting to support the analysts’ views. The current read shows the swaps market is pricing in a 65% chance of a 25 basis points rate cut for next month. The current medium analysts call is a 50/50 split for a 25 basis point cut, with 13 out of 26 economists’ surveyed calling for a cut.
So this is why today’s 11.30 am AEST CPI figure will be watched with so much intent. The AUD will respond most heavily to the straight CPI figure year-on-year; Bloomberg estimates are calling on a figure of 2.5%. However, central banks all over the world tend to disregard the straight CPI figure as there are seasonal distortions and outliers.
The figure that the RBA will be watching very closely is the CPI trimmed mean year-on-year which filters out these seasonal issues and is their preferred measure of inflation. The call for the trimmed mean CPI figure is 2.1%.
From a pure risk-reward perceptive, long positions are favoured given the current extreme levels of short positioning in the AUD. If the CPI print is weaker than expected, a fall of around 40 to 50 pips is on the cards. Whereas a good print of say 2.5% (trimmed mean) would see an 80 or so pips rally, so upside risk seems to be the side with the most to gain.
This isn’t the only piece of data that will affect the AUD today. The HSBC flash PMI data out of China will also be heavily watched. The survey encompasses small and medium enterprises which have been the hardest hit by the wringing out of speculative lending.
What is interesting is the forecasted figure which has been revised lower from 48.8 to now replicate last month’s figure of 48.2. Contraction is expected in the short term; the structural changes occurring in China will see some short term pain for good long-term gain and prosperity.
What might change this figure in the coming months is reports from the Beijing News Agency that Premier Li Keqiang has stated ‘China will not permit economic growth to sink below 7%.’ This should add confidence over the coming months and may even see monetary easing; highly beneficial to ASX cyclical stocks
The final pieces of data for D-Day are the plethora of European nations releasing PMI data. France, Germany, Italy and a combine European Union figure for both manufacturing and services will also hit the newswires tonight. The risk currencies are the markets to watch – EUR/USD currently $1.321; ‘whatever it takes’ levels is when the pair hits $1.34/$1.35 levels.
Moving to the open, we are calling the ASX 200 dead flat, down a solitary point to 5016 after the S&P broke a four day winning streak overnight. Commodities continue to drive momentum with gold plays the ones to watch with the precious metal back in sight of $1350 an ounce. BHP looks set to continue its run higher with its deposit receipts suggesting the stock should add 38 cents today to $34.88 (+1.09%) - its highest level this winter - as once more iron ore remains above $130 a tonne to $131.90.
It is going to be a day of momentum with currencies leading the markets, so all eyes on the Nikkei, Shanghai Composite and the ASX.