The Reserve Bank of Australia (RBA) last cut interest rates to 2 percent in May this year. However, with weak inflation data and China’s dismal manufacturing data, there’s a slight possibility of the RBA cutting rates on Tuesday.
In fact, the markets are pricing in a 49 percent chance of a 25 basis-point rate cut from the RBA tomorrow. The annual change in the Consumer Price Index (CPI) held steady at 1.5 percent in the third quarter, missing the 1.7 percent forecast and the RBA’s 2-3% target band.
The weak CPI number certainly gives the RBA scope to ease further, but other factors are likely to be the driving force behind a cut, namely employment and economic growth.
Another key argument for a rate cut has been the recent mortgage rate increases from the ‘big four’ banks, put in place to cover higher capital requirements enforced by regulators to buffer the financial system from a potential housing-market crash.
Higher mortgage rates are an effective tightening of monetary policy, which could force the RBA to offset tighter conditions by cutting the cash rate.
Global management consultancy Hay Group said last week that Australia’s wage gains in 2016 are unlikely to keep pace with the already slow rate of inflation, meaning real salaries are set to drop. That could accelerate a move by the country’s highly indebted households to dip into savings to maintain their spending power.
Australia’s economy is adjusting to falling national income after a 35 percent drop in prices for its commodity exports, which is feeding into stagnant wages, a slumping currency and low rates as policy makers try to keep growth afloat. Reflecting the increasing competition among retailers for the few extra dollars earned by households, Woolworths, one of Australia’s largest supermarket chains, lowered prices for its most popular goods by 1.8 percent last quarter.
Elsewhere in China, the official purchasing managers index (PMI) was unchanged at 49.8 in October, according to data by the National Bureau of Statistics. The official non-manufacturing PMI, a barometer of services and construction, fell to 53.1 from 53.4 in September, the weakest since December 2008.
Caixin Media and Markit Economics released the results of their private manufacturing survey on Monday, which posted a reading of 48.3 for October, compared with the estimate of 47.6. China needs to have an average economic growth of above 6.5 percent in the next five years to meet the goal of achieving a “moderately prosperous” society by 2020, Premier Li Keqiang said in a speech in Seoul over the weekend.
The slowdown has been met with an unprecedented response from the central bank, having cut interest rates six times in less than a year and trimmed reserve requirement ratios for banks on a number of occasions too. However, China’s economy is still set to grow at its weakest pace in 25 years this year. On Monday, China’s stock markets opened with heavy losses, as Hong Kong’s benchmark Hang Seng index fell 1.07% to 22,400.79 points at the opening bell, and mainland China’s benchmark Shanghai Composite dropped 1.09% to 3,345.73 points.
Top News This Week
AUD: Cash Rate. Tuesday 3rd November, 11.30am.
Possible rate cut to 1.75% (previous figure was 2%).
AUD: Retail Sales m/m. Wednesday, 4th November, 8.30am.
I expect figures to come in at 0.3% (previous figure was 0.4%).
USD: Non Farm Payrolls. Friday 6th November, 9.30pm.
I expect figures to come in above 160K (previous figure was 142K).
Short AUD/USD at 0.7130
On the H1 chart, AUD/USD is moving in a range of about 90 pips. With the weak CPI data from Australia and the subsequent weak manufacturing data China, I expect gains on AUD/USD to be fairly subdued this week.
The RBA could also surprise the markets with a rate cut tomorrow morning. We will go short once prices head down to 0.7130 as a resistance is seen at 0.7147. A stop loss of 30 pips is placed above the last high and we will have two targets on this trade, exiting the first position at 0.7100 and the second one at 0.7070.
Entry Price = 0.7130
Stop Loss = 0.7160
1st Profit = 0.7100
2nd Profit = 0.7070