Aussie drops under rate cut pressure

Summary:

• Australian dollar leads the losses in the G10 basket after Westpac brought forward its call regarding a rate cut
• Japanese manufacturing ticks up, BoJ likely to revise its inflation forecasts down
• US officials are set to travel to China this Monday for the first round of face-to-face negotiations

Weak PMIs and Westpac’s call

The Australian dollar is the weakest performing major currency this morning after Westpac brought forward its rate cut call to October from November, underlining the need for the Reserve Bank of Australia to act quicker. The Australia-based bank wrote in a note that the exchange rate was providing less support than expected as the Aussie actually appreciated in the wake of the two rate cuts delivered by the RBA earlier this year. On top of that, Wesptac expects the labour market to deteriorate relative to RBA expectations sufficiently by October to warrant a cut. Moreover, the bank sees some chance to see a rate decrease as soon as September, but it is not its base scenario. Finally, the bank noted that consumer sentiment surprised by falling almost 5% after the RBA two cuts. Looking at the market-based probability one may notice that market participants assign roughly 60% chance to see a rate cut by October, hence there is still some room to surprise them. In addition to Westpac's call, we were offered another gloomy bag of PMIs from the Antipodean economy for July. The index for manufacturing fell to 51.4 from 52 and the index for services dropped to 51.9 from 52.6. As a consequence, the composite PMI declined to 51.8 from 52.5. In its commentary to the data Markit wrote that staffing levels decreased for the first time in three month while the rate of input cost inflation continued to accelerate and was sharp in July, in turn, output prices were raised modestly.

The Australian dollar is losing almost 0.4% against the US dollar this morning being by far the worst performing major currency. Technically the pair failed to break above its pivotal 200DMA last week strengthening the odds for a pullback in the nearest future. The first notable support could be localized nearby 0.6920. Source: xStation5

Japanese PMI rises, BoJ to cut CPI forecasts again

Apart from the PMI data from Australia, the same readings were also released from Japan and they were a bit more positive. In July, manufacturing PMI ticked up to 49.6 from 49.3 while services PMI rose to 52.3 from 51.9. Although the uptick in manufacturing could be viewed positively, one needs to note that the index stayed below the 50-point threshold for a third consecutive month. Comments from Markit pointed that weak demand from China remained a key factor behind sluggish demand for Japanese goods. Moreover, Markit stressed heightened frictions between Japan and South Korea which also added downside risk to the manufacturing supply chain there. Let us remind that Japan tightened restrictions of exports to South Korea earlier this month (it includes things like chips and smartphone displays). 

Meanwhile, the Bank of Japan is likely to revise its 2019 inflation projections down when it meets next week, according to Bloomberg. It added that the 2019 fiscal year CPI forecast could be lowered to 1.1% reflecting subdued price growth in recent months and the impact of cheaper cell phone charges. Discussions regarding the possible impact of 2019 CPI forecast cut on inflation projections for later years might also be held. Furthermore, the BoJ may also decide to lower its GDP projections amid mounting uncertainties over the direction of the global economy. It is worth noting that Japan is going to hike sales tax to 10% from 8% in October which could bring on consumption to slow markedly, that was the case in 2014 when sales tax was hiked to 8% from 5%.

While Japanese manufacturing remained lacklustre in July, the services sector still fared quite well. Source: Bloomberg

In the other news:

• US officials are set to travel to China this Monday for the first round of face-to-face negotiations 

• New Zealand’s trade surplus amounted to 365 million NZD in June, above the median estimate of 100 million NZD

• Visa reported EPS at $1.37 (est. $1.32) and revenue at $5.8 billion (est. $5.7 billion)