Reserve Bank of Australia cuts rates

Global markets remain choppy but the medium-term fundamentals remain in check, with central banks being the key drivers of sentiment and price action.

Reserve Bank of Australia
Source: Bloomberg

The Reserve Bank of Australia (RBA) and Reserve Bank of India have been the key ones to watch in Asia today with some mixed feelings about how it was all going to play out heading into the meetings. In Australia, the swaps market had been pointing to a cut for a while and the RBA delivered on this today.

Interest rates in Australia were cut by 25 basis points to a record 2.25%. With growth continuing at a below-trend pace, domestic demand growth quite weak and unemployment moving higher, the RBA felt it necessary to cut rates. Output growth is expected to remain below trend and unemployment is likely to peak a little higher than the RBA earlier expected.

While the AUD has declined notably against the USD, on a trade-weighted basis the RBA feels it hasn’t declined enough. The RBA believes a lower AUD is still needed to achieve balanced growth, particularly with commodity prices weakening. Regarding the lower oil prices, the RBA feels this will act to strengthen global output and temporarily lower CPI inflation rates.

All up, the statement perhaps didn’t sound as dovish as many would have wanted to reinforce the idea of another rate cut being on the way. The RBA will be looking to see if this can support demand and bring growth and inflation back towards its target.

It certainly doesn’t seem the RBA will be in a hurry to cut again but, given the pressure from other global central banks acting, it seems this wouldn’t be completely out of reach. At the same time, traders will have learnt just how much weight market pricing carries compared to simply looking at economists’ expectations.

ASX 200 rallies while the AUD falls

In terms of price action, the ASX 200 surged on the back of the cut, knocking through August 2014 highs and heading towards 5700. This is the local market’s highest level since May 2008 and momentum is overwhelmingly positive right now.

Predictably, the yield plays are leading the gains with banks rallying, while there are also solid gains for property stocks and some of the consumer names. The energy sector was already doing well on the back of the recent gains in oil and has managed to extend gains along with the rest of the market.

AUD/USD broke below last week’s lows in the $0.7720 region and the losses accelerated with momentum mounting to the downside. This is the lowest level since May 2009 and traders will be looking to ride the momentum in the near term.

Some analysts have been talking about a medium-term target for AUD/USD of $0.7500. It’s not only against the USD that the AUD is struggling, but also against pretty much all the majors.

Firmer open for Europe

Ahead of European trade, we are calling the major bourses firmer with the DAX likely to trade at a fresh record high. After all the negative tape about Greece after fears primarily fuelled by Syriza coming into power, it seems we are starting to see a degree of calm prevail.

Prime Minister Tsipras sounded a lot more subtle over the weekend and investors feel the aggressive / hard-line approach to the debt situation might be subsiding. Tsipras has said negotiations have been constructive but I still feel some traders are likely to take this with a grain of salt.

A round of encouraging manufacturing PMIs also helped sentiment and, in recent times there have been signs of bottoming in European data. Out of Europe today we have Spanish unemployment, UK construction PMI and Europe’s PPI due. The PPI reading is expected to contract due to the recent fall in energy prices.

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