Market Briefing: RBA defying gravity
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack.
Push pull. US tariff related jitters have given the USD a bit of renewed support the past few days. AUD recouped some lost ground after RBA held steady.
RBA holds. Interest rates kept at 3.85% with the RBA Board wanting more time/information before acting again. Q2 CPI due in late July.
All about timing. RBA decision was 'timing not direction'. More interest rate relief in pipeline. RBNZ meets today. Will it pause its easing cycle?
Global Trends
There have been a few wobbles and bursts of volatility across markets over the past few days. US tariff related risks have come back into the markets line of sight and economic events such as yesterday’s RBA ‘on hold’ decision surprised. After Monday’s pull back US equities tread water overnight (S&P500 -0.1%), bond yields edged higher (at ~4.40% the US 10yr rate is near its 6-month average), while the USD index has ticked up so far this week with EUR (the major USD alternative) drifting back towards ~$1.1725 and USD/JPY (the second most traded currency pair) rising (now ~146.55). Ahead of today’s RBNZ decision (12pm AEST) where no change in rates is anticipated the NZD has dipped down to ~$0.60. By contrast, the upward adjustment in Australian interest rate expectations after the RBA defied predictions helped the AUD outperform overnight and recoup a bit more than half of Monday’s decline (now ~$0.6529).
With respect to tariffs, following on from weekend news the US was sending out letters to inform nations including Japan and South Korea that import duties are set to jump up towards ‘Liberation Day’ levels on 1 August if deals aren’t struck and/or negotiations aren’t conducted in good faith President Trump hit the wires again overnight. According to President Trump he won’t be offering additional delays on country-specific levies, and in terms of sectoral tariffs a 50% duty on copper imports is in the works while pharmaceuticals may face a “very, very, high rate, like 200%” though that might not come in for another 12-18 months. In response to the news copper prices rose ~10%, taking year-to-date gains to ~35%. Economically, tariffs on copper shouldn’t be that impactful as copper accounts for less than 0.5% of US goods imports. However, as shown, pharmaceuticals are a larger share of US imports (nearly 9%), with ~1/2 of those goods shipped across by the EU.
In our opinion, the prospect of more tariff-related headlines coming out over the period ahead could give the USD index (which is still below our ‘fair value’ estimate) some additional near-term support. That said, as outlined before, we think this should be a short-term adjustment. We remain of the view that the prospect of weaker US growth stemming from heighted uncertainty and higher import costs faced by businesses/consumers, outlook for a weaker jobs market and lower US interest rates, and/or reduced capital inflows into the US could see the USD steadily weaken over the medium-term.
Global event radar: RBNZ (Today), China GDP (15th July), US CPI (15th July), US Retail Sales (17th July)
Trans-Tasman Zone
After losing ground at the start of the week due to the firmer USD and renewed US tariff-related concerns (see above) the AUD (now ~$0.6529) perked up yesterday after the RBA kept interest rates steady. This also saw the AUD outperform on the cross-rates with gains of ~0.4-0.6% recorded against EUR, GBP, NZD, CAD, and CNH while AUD/JPY increased ~0.9%. By contrast, NZD/USD extended its pull-back to be tracking just above its 50-day moving average (~$0.5910).
As mentioned, the RBA went against traders and analysts’ expectations yesterday by keeping the cash rate at 3.85%. Ahead of the event markets were assigning a ~95% chance of another 25bp rate cut being delivered with 27 of 32 economists surveyed also forecasting a move. The post meeting statement and RBA Governor Bullock’s press conference indicated the decision was one of ‘timing not direction’ with the majority of board members wanting a little more time and information to “confirm that inflation remains on track to reach 2.5%pa on a sustainable basis”. By the 12 August meeting the RBA will have the June employment figures (released 17 July), the more detailed Q2 CPI (released 30 July), additional partial indicators of consumption, more tariff-related news, and updated staff economic projections available.
A 25bp interest rate reduction next month still looks to be in the pipeline, in our opinion. Markets share this assessment with it deemed to be a ~90% probability of occurring. While yesterday’s decision by the RBA to hold firm was a surprise it further reinforces our long-held belief that because of lingering domestic inflation worries and a resilient labour market the easing cycle should be slow/limited and that markets had probably jumped the gun by factoring in too many rate cuts over the next year. In our opinion, the lagging RBA, coupled with a softer medium-term outlook for the USD, and upturn in China’s commodity intensive domestic growth drivers, should see the AUD grind higher the next few quarters.
Across the Tasman the focus today will be on the RBNZ (12pm AEST). As the RBNZ won’t be updating its forecasts this time around, and with things generally tracking as per if not a bit better than anticipated, most analysts are forecasting the RBNZ cash rate to be left at 3.25%. If realised this would be the first pause in the RBNZ’s easing cycle since last August. We think that given ~40bps of rate reductions are still discounted by end-2025 a ‘neutral’ sounding statement that keeps the RBNZ’s options open might give the NZD intra-day support. Though a ‘surprise’ rate cut could see the NZD fall back further.
AUD & NZD event radar: RBNZ (Today), China GDP (15th July), US CPI (15th July), AU Jobs (17th July), US Retail Sales (17th July)
AUD levels to watch (support / resistance): 0.6450, 0.6490 / 0.6580, 0.6630
NZD levels to watch (support / resistance): 0.5880, 0.5930 / 0.6040, 0.6080
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
WEDNESDAY (9th July) AUD RBA’s Hauser Speaks (9am) CNY CPI/PPI (June) (11:30am) NZD RBNZ Decision (12pm) EUR ECB's Lane Speaks (8:45pm) EUR ECB’s Guindos Speaks (9pm) EUR ECB’s Nagel Speaks (10:15pm)
THURSDAY (10th July) USD FOMC Meeting Minutes (4am) EUR ECB’s Cipollone Speaks (5pm) EUR ECB’s Villeroy Speaks (6pm) USD Initial Jobless Claims (10:30pm) USD Fed’s Musalem Speaks (11pm)
FRIDAY (11th July) GBP BoE's Breeden Speaks (3:45am) USD Fed’s Daly Speaks (4:30am) GBP GDP – Monthly (May) (4pm) EUR ECB's Panetta Speaks (6pm) EUR ECB's Vujcic Speaks (6:40pm) EUR ECB's Cipollone Speaks (9:30pm) CAD Jobs Report (June) (10:30pm)
*Note, all times/dates provided are AEST
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