This morning, the Reserve Bank of Australia, once again brought its cash rate lower by 25bps. The euro continues to weaken against the US dollar. Commodities took a dive yesterday.
RBA Cuts Cash Rate
During the early hours of the European morning, the Reserve Bank of Australia once again cut its rate by 25bps, bringing it to +0.75%. This is the all-time low that the rate has eve been. Although the bank’s accompanying statement says that the overall outlook remains reasonable, still the risks are tilted more to the downside. The Bank is concerned about the ongoing trade tensions between China and the US, as it is affecting international trade flows. Advanced economies are showing that wage growth is picking up, but inflation remains low. Although the RBA is quite satisfied with its own domestic economy, one element continues to bother them is the outlook for consumer spending, as consumptions remains on the lower side.
Last year, the RBA stood aside from raising or lowering their cash rate, but this year, the RBA cut the rate by half from the beginning of this year, from +1.50% to +0.75%. In the Bank’s statement, they support such a move by saying that this is done in order to further support employment and income growth. In addition to that, they are trying to get inflation which is currently at +1.6%, closer to its target. RBA’s inflation target on average in between 2 and 3 percent. So far, the current number is lagging way behind.
AUD/USD — Technical Outlook
Looking at the technical picture of AUD/USD, we can see that it continues to trade below a short-term tentative downside resistance line taken from the high of July 18th. But most importantly, the pair took a strong dive today, as the RBA lowered its cash rate by 25bps. AUD/USD broke below its key support area, at 0.6735, and is now drifting further south. For now, we will remain cautiously-bearish, as the rate is slowly approaching another one of its strong areas of support, at 0.6687, a break of which is required before examining further declines.
As mentioned above, AUD/USD is slowly moving towards the 0.6687 hurdle, which held the rate from moving lower on August 25th and September 3rd. If that area holds again, we could see a small rebound back up a bit. That said, if the pair fails to move above the 0.6710 barrier, this may result in another leg selling, potentially bringing the rate to the 0.6687 zone. If the bears are still feeling more comfortable then, a break of that zone could invite more sellers into the game. Such a move would confirm a forthcoming lower low and may clear the path in the direction of the 0.6600 level.
On the other hand, if the pair corrects higher and travels back above the previously-mentioned 0.6735 hurdle, this might temporarily spook the bears from the field in favour of the bulls. The rate could then rise to the 0.6776 barrier, marked by today’s high, a break of which may lead AUD/USD to the 0.6810 level. That level marks the high of September 19th and is also near the aforementioned downside line, which may provide additional resistance.
EUR/USD Falls Below 1.09
Yesterday, the common currency fell below the 1.09 mark against its US counterpart, as two German leading economic institutes have revised their economic growth for 2019. Although Germany’s employment numbers did not disappoint yesterday, the country’s retail sales figures on a YoY basis did show a slide. The forecast of +3.3% was already way below the previous revised +5.2% number. The actual reading came out at +3.2%. All this is adding up to the already declining inflation and the sliding GDP growth rate. Also, Germany’s manufacturing sector still cannot get out of the contraction territory from the beginning of this year, which is also not helping to support the economic outlook of the eurozone as a whole.
Last time EUR/USD tested current levels was back in May 2017. For now, it seems that there is no light at the end of the tunnel for the euro against the greenback. The big question here is, can it repeat the story of December 2016, when the EUR/USD rate fell to levels slightly above the 1.03 mark? Certainly, it would be difficult to say. But could there be a bit more downside in the near term? If the EU economy doesn’t start growing again, this may be something to watch out for, as the weaker euro might be maintained in order to help European companies to make their goods and services more attractive on the global arena.
EUR/USD — Technical Outlook
The euro took a dive yesterday against its US counterpart, falling below its key support levels, at 1.0925 and then below 1.0905, and testing the area near the 1.0884, this way creating a new low for September. Overall, the pair continues to trade below its medium-term downside line taken from the high of June 25th. Even though we could see a small correction back up, still, the short-term outlook remains slightly more to the negative side.
If the rate gets a pullback to the 1.0905 hurdle, or even to the 1.0925 barrier, which acted as a strong support September 3rd and 12th, the pair may get a hold-up around there. If the bears see that zone as a good level to step in again, this could lead to another slide in EUR/USD, possibly moving back to the 1.0884 obstacle, a break of which may clear the path to the 1.0839 mark. That mark is the lowest point of May 2017.
Alternatively, if the rate moves higher and rises above the 1.0947 barrier, marked by the high of September 30th, this may spook the bears from the field for a while and we could see the pair pushing further north, possibly aiming for the 1.0985 hurdle. That hurdle is marked by the lows of September 11th and 24th. If the buying doesn’t stop there, EUR/USD could continue drifting higher and the next potential target might be seen around the 1.1024 level, which is near the highs of September 23rd and 24th. Around there the rate could also test the aforementioned downside line, which may provide additional resistance.
Equities Rise, Commodities Fall
On the positive note, global equities managed to close in the positive territory. This was mainly driven by the optimism coming out of the whole Trade War saga. Yesterday, Peter Navarro, who is the White House trade advisor has assured that the government is not currently looking into the possibility of limiting Chinese company listings on US stock exchanges. As we know, there will be high-level trade talks held next week, which we will monitor carefully. That said, we also believe that no major agreements will be achieved then. At the moment, the US is more than happy to continue with its protectionism tactics and China is most likely waiting for the next year’s US elections, where they would hope to see a new US leader, with whom they could try and negotiate a better deal. This means that from the currency perspective, the Chinese yuan could continue being on the low side against its US counterpart. This way, Chinese goods and services can continue being more attractive for the US business and consumers, despite the current tariffs that are in place.
Commodities took a strong hit yesterday as well. Oil took a dive, as the news came out that Saudi Arabia managed to restore their output to pre-attack levels. This doesn’t come as a huge surprise, as the oil-dependant Saudi Arabia had to get back to its normal oil-production levels as soon as possible, in order not to cause a major disruption in its economy. Gold was also one of those commodities that took a hit. The precious metal got back to the August levels again, as equity markets started slowly picking up again, due to a positive tone, which is coming out of trade talks. This is why gold, which is considered as a safe-haven when the times are gloomy, is sliding and as long as we will be getting positive headlines regarding the Trade War, the fall in price may continue for a bit more.
As for today’s events
During the European day, we get preliminary inflation data for September from the Eurozone. The headline rate is forecast to have remained unchanged at +1.0% yoy, while the core one is anticipated to have risen to +1.0% from +0.9%. That said, bearing in mind that the German CPI is forecast to have slowed somewhat, we see the case, at least for the bloc’s headline rate, to have moved lower as well.
From the UK, we get the manufacturing PMI for September. On Wednesday, the construction index is due to be released, while on Thursday, we have the services print. The manufacturing index is forecast to have declined further into the contractionary territory, to 47.0 from 47.4, while the construction one is forecast to have ticked down to 44.9 from 45.0. The more-important services print is expected to have declined to 50.3 from 50.6.
From the US, we get the ISM manufacturing PMI for September, while from Canada, we have the monthly GDP for July. The ISM index is expected to have returned within the expansionary territory (50.1 from 49.1), while Canada’s GDP is forecast to have slowed to +0.1% mom from +0.2%.
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Originally published at https://www.jfdbank.com on October 1, 2019.