RBA Surprises with a Quarter-Point Hike and German Factory Orders Disappoint
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitCrCJXk1iXF3OdRgy5tmK5_YM9erM__g8uZI9s-2RacXHTi4ZVrhq8ft5CivJAg1QBwYOMC4_nFaTZkZNfso5dIrQVxUpTXdY9e42tODNJd3YkjQzknr4KHS35x0QVZKkAyQAVOGGt2fHQTnaNgXlR4pik8RvuQklJwUKCpCiKfJ1KPXz6_qacrgocQ/s690/sausage%202.jpg"><img alt="" border="0" data-original-height="383" data-original-width="690" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitCrCJXk1iXF3OdRgy5tmK5_YM9erM__g8uZI9s-2RacXHTi4ZVrhq8ft5CivJAg1QBwYOMC4_nFaTZkZNfso5dIrQVxUpTXdY9e42tODNJd3YkjQzknr4KHS35x0QVZKkAyQAVOGGt2fHQTnaNgXlR4pik8RvuQklJwUKCpCiKfJ1KPXz6_qacrgocQ/s400/sausage%202.jpg" width="400" /></a></div><p><b><span>Overview: </span></b><span>The Reserve Bank of Australia surprised
many with a quarter-point hike and German factory orders unexpectedly fell.
Reports suggest that China has asked banks to cut deposit rates. The next
result is the Australian dollar is the strongest currency in the G10 and helped
lift the Canadian dollar ahead of the Bank of Canada meeting tomorrow. Australian
stocks sold off (~1.2%) while large markets outside of China rose in the region.
Europe's Stoxx 600 is straddling unchanged and US equity futures are a little
softer. Leaving aside Australia and New Zealand, bond yields are 2-5 bp lower. That
puts the 10-year US Treasury yield near 3.66%. <o:p></o:p></span></p><p><span>The dollar is mixed among the
majors. The dollar-bloc currencies dollars are joined by the Japanese yen
and Swedish krona, posting mostly small gains against the greenback. The other
European currencies are struggling. Among emerging market currencies, the
Indonesian rupiah and Mexican peso are leading the few advancers today. Turkey
and other central European currencies are weaker. Gold is consolidating in a
narrow range (~$1957-$1964) near yesterday's high (~$1964). Oil prices are less
impressed with the Saudi's cuts and after jumping to $75 a barrel yesterday,
July WTI has been sold to almost $70 today and is now hovering near $71.</span><span> </span></p><p><b><span>Asia Pacific</span></b><span></span><o:p></o:p></p><p><b><span>The Reserve Bank of Australia
lifted its cash target rate by 25 bp to 4.10%. </span></b><span>It was only about a quarter priced in and
the Australian dollar initially reacted positively to the surprise. Inflation
and inflation expectations have been rising and the government’s budget and
minimum wage hike is seen adding more fuel. The RBA indicated that additional
increases may be necessary. The swaps market has about an 80% chance of another
quarter-point hike discounted by the end of Q3. Separately, Australia reported
a A$12.3 bln current account surplus for Q1 23, a little smaller than expected
and Q4 22 was revised lower. It a bit less than twice the 2022 average (A$6.7
bln). Despite the widening of the current account surplus in Q1, the Australian
dollar under-performed, falling nearly 1.9% in Q1. Only the Norwegian krone
fell more among the G10 (-6.4%).<o:p></o:p></span></p><p><b><span>Japan's April income and
consumption data disappointed. </span></b><span>Household spending fell on a year-over-year basis for the second
consecutive month in April. The 4.4% drop was nearly twice as large as the
2.4% decline of the median forecast in Bloomberg's survey and is the largest
fall since September 2020. In April 2022, spending was 1.7% lower over the
previous year. Labor cash earnings slowed to 1.0% from a revised 1.3%
year-over-year increase (from 0.8%) in March. In the 12-months through April
2022 labor's cash earnings rose by 1.3%. The Bank of Japan meets next week and
many look for Governor Ueda to begin to adjust policy. It could begin next week
with a change from an easing bias toward neutral. Several surveys had picked up
expectations that the yield-curve-control may be jettisoned or modified as
early as this month. However, expectations appear to have softened though many
still see it coming before the end of the fiscal half year at the end of September.<o:p></o:p></span></p><p><b><span>Softer US rates has seen the
dollar extended its pullback against the Japanese yen. </span></b><span>It reached JPY140.45 yesterday, settled
near JPY139.60, and sold to about JPY139.10 today. A break of JPY139.00 could
spur a return to last week's low around JPY138.45. <b>The RBA's hike that
took many by surprise lifted the Australian dollar to $0.6685, a three-week
high after settling yesterday near $0.6615.</b> It stopped in front of the
200-day moving average (~$0.6690) and the $0.6700 level where A$1.24 in options
expire tomorrow. After the initially flurry of buying, the Aussie pulled back,
reaching about $0.6655. Last Friday and yesterday's highs (slightly below
$0.6640) may offer nearby support. <b>The greenback is firm against the Chinese
yuan, but within yesterday's range (~CNY7.0940-CNY7.1245). </b>News that
officials have requested banks to cut deposit rates (for the second time this
year) by five bp for demand deposits and 10 bp on three- and five-year deposits
encouraged speculation of easier monetary policy. The PBOC set the dollar's
reference rate at CNY7.1075 today, a little lower than the CNY7.1083 projected
by the median in Bloomberg's survey. <o:p></o:p></span></p><p><b><span>Europe</span></b><span></span><o:p></o:p></p><p><b><span>After avoiding a winter
energy crisis, economic activity in the eurozone faltered late in Q1, and this
could result in a small contraction in Q1 GDP, which will be revised from 0.1%
later this week. </span></b><span>Some
data gave hope of a better start to the second quarter. Earlier today, Eurostat
reported flat April retail sales after a revised 0.4% decline in March (from
-1.2% initially. More telling was the rise in German exports (1.2% in April)
reported yesterday, defying expectations for a 2.5% decline. However, the green
shoots were dashed today amid a disappointing 0.4% fall in Germany factory
orders. The median forecast in Bloomberg's survey was for a 2.8% rise in
Germany factory orders following a dramatic 10.7% plunge in March. The series
was dragged down by large-scale orders, without which, orders would have risen
by 1.4%. Industrial output will be reported tomorrow. It is seen recovering
after March's 3.4% drop. The eurozone's aggregate industrial production figure
will be reported next week and Spain's 1.8% drop reported earlier today will
not help (it was expected to have fallen by 0.5%). <o:p></o:p></span></p><p><b><span>The euro had extended the
recovery off yesterday's low near $1.0675 and reached almost $1.0735 before the
disappointing German data. </span></b><span>It
has been sold back toward $1.0685 in the European morning. A break of
yesterday's low could see a retest on last week's low closer to $1.0635. <b>For
its part, sterling could not take out yesterday's high (~$1.2460) and the
selling pressure has taken it back to almost $1.2400. </b>Yesterday's low was
near $1.2370. The low in late May was just ahead of $1.2300. That said, the
euro and sterling losses in the European morning are stretching the intraday
momentum indicators. <o:p></o:p></span></p><p><b><span>America</span></b><span><o:p></o:p></span></p><p><b><span>After yesterday's flurry of
economic data and bill issues, the US economic agenda turns quiet today. </span></b><span>The bill auctions were well-received amid
talk of pent-up demand. Wednesday sees the 4- and 8-week T-bill sales and
April's trade deficit, which is expected to widen sharply to around $75.5 bln.
That would represent a nearly 18% deterioration, the most in more than a
decade. April's consumer credit will also be reported Wednesday. Consumer
credit rose by an average of $21.6 bln a month in Q1. It is the slowest quarter
since Q3 21. The median forecast in Bloomberg's survey projects a $22 bln
increase in April. Last April, it rose by $28.9 bln.<o:p></o:p></span></p><p><b><span>Canada reports April
building permits and the IVEY PMI. </span></b><span>These typically do not move the market, and this seems especially
true ahead of Wednesday's Bank of Canada meeting. The economic strength and
resilient inflation have seen a dramatic market pivot toward expecting the
central bank end its "conditional pause" that was announced in
January. The swaps market has about a 44% chance of a hike discounted. A hike
is fully priced in for the July 12 meeting. That would bring the overnight
target rate to 4.75%. The year-end rate is now seen 4.88% after briefly trading
above 4.90%, highest in two months. As recently as May 12, the year-end rate
was seen near 4.0%.<o:p></o:p></span></p><p>
<o:p>
<o:p>
</o:p></o:p></p><p><b><span>The RBA-inspired Australian
dollar gains appeared to help the Canadian dollar.</span></b><span> The US dollar briefly traded below
CAD1.3400 for the first time since May 11. However, the greenback has
resurfaced above CAD1.3400 and reached CAD1.3435 in the European morning where
has been greeted with fresh sales. The intraday momentum indicators suggest
potential to retest the lows in North American activity, perhaps on position
adjustment ahead of tomorrow's Bank of Canada meeting. <b>Meanwhile, the dollar
is in a narrow range against the Mexican peso and pinned in its trough. </b>At
the end of last week, the greenback set a marginal new multi-year low near
MXN17.42. Today's low has been about MXN17.4340. Initial resistance is seen in
the MXN17.46-MXN17.50 area. Mexico reports May CPI on Thursday. The central
bank has paused and may consider a rate cut (11.25% overnight target) in Q4. Note
that Brazil reports May IPCA inflation tomorrow and its central bank is also
expected to soon provide some guidance on a rate cut. The Selic target is
13.75% and IPCA inflation is expected to slip toward 4%. <o:p></o:p></span></p><p><br /></p><p><br /></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" target="_blank"><span>Disclaimer</span></a></p>
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