With the deepening slide in commodity prices, fears of a China slow-down and the Fed poised to raise interest rates you would have thought there were enough reasons for the RBA to consider cutting rates in September, however, according to ASX’s market-based gauge the probabilities of the RBA pressing the button have fallen, in recent days, from 10.0% to only 8.0%.
Nevertheless it appears the board is “keeping an open mind” on the subject of interest rates according to deputy governor Kent who gave a presser today (Friday 14).
Meanwhile, the chances of the Federal Reserve hiking rates in September now stands at 45% according to Fed Funds Futures.
Australian unemployment continues rising, reaching 6.3% in the most recent report, whilst U.S unemployment remains at 5.3%. Wage data for both countries is low. The diverging trend is represented in the chart below. It has grown even more marked in Q2, and is another reason to remain bearish the aussie.
There appears to be no desire by the RBA to let the aussie appreciate, according to Kent, who sees more “pass through” down for the aussie.
The euro gained ground over the pound after the surprisingly doveish BOE minutes poured cold water on early rate hike expectations – and the euro benefited from an increased stability factor after Greece got its bailout.
The recent ECB minutes earlier this week, however, were more negative-than-expected, doing down the recovery in the euro-area, which it described as “disappointing,” continuing to highlight the region’s “risks to the downside,” and expressing concerns once again about deflation. The minutes even went as far as stating the board were ready to act if necessary, presumably increasing QE as required. This in turn weakened the euro.
Ultimately it is unlikely the ECB will increase its QE programme yet – so the risks to the pair remain on the sterling side and revolve around when the BOE is forecast to raise interest rates, thus U.K data may have the most impact, unless we see an extreme drop in Euro-zone inflation data.
The pair hit 5-year lows of 0.6466 on Monday after China devalued its currency by almost 2.0% amidst fears a slow-down in its foremost trading partner would reduce demand for New Zealand’s key dairy exports.
China slow-down fears combined with the RBNZ’s admission at its last rate meeting (where it reduced rates by 0.25%) that “further easing seems likely,” have increased the chances of yet another cut at the RBNZ’s September 10 meeting. There is a 45% chance the Fed may raise rates the day after.
Overall the down-trend seems likely to extend given the continued diverging monetary policies of the U.S and New Zealand central banks.