RBA decision in focus

With the week coming to an end, we take a look what next week has in store for the markets. On a monetary level, we highlight the release of the BOJ June monetary policy meeting minutes on Monday, the RBA’s interest rate decision on Tuesday and on Thursday we get the BOJ’s July summary of opinions and RBA Governor Bullock is set to speak.As for financial releases we make a start on Monday with the release of Australia’s final judo bank composite PMI figure and Turkey’s CPI rate both for the month of July, the Czech Republic’s retail sales rate for June, France’s services PMI figure and Germany’s Services PMI figure following by the Eurozone’s final composite PMI figure all for the month of July, the zone’s sentix index figure for Aug, the US final composite and services PMI figure for July and ending off the day with the US ISM non manufacturing PMI figure for July. On Tuesday, we make a start with Germany’s manufacturing output rate , followed by Canada’s trade balance figure both for the month of June. On Wednesday, we get New Zealand’s unemployment rate for Q2, followed by Australia’s manufacturing index figure, China’s trade balance figure both for July, followed by Germany’s industrial production rate for June, the UK’s Halifax house prices rate and Canda’s Ivey PMI figure both for July. On Thursday we get the Czech Republic’s unemployment rate for July. On Friday we get China’s CPI rate, Germany’s final HICP rate, Norway’s CPI rate and Canada’s employment data all for the month of July.

USD – Fed remains on hold, door for September rate cut is open

On a fundamental level for the USD we note that the US Presidential race remains tight, with Vice President Harris managing to maintain her announcement momentum, with pollsters having former President Trump and VP Harris neck and neck. On a macroeconomic level, we note the financial releases from the US tend to paint a mixed picture for the US labour market, with the ADP employment and JOLTs Job openings figure contradicting one another. As such we keep our eyes on the release of the US Employment data for July which is due out later on today. Should it showcase a loosening labour market, it may increase pressure on Fed to cut interest rates in their September meeting, whereas a resilient labour market may prolong a rate cut which in turn may aid the greenback. Although, following the Fed’s interest rate decision on Wednesday in which the Fed remained on hold as was widely expected, the market expectations for a rate cut in September are currently per FFF, an 88.25% probability for a 25bp cut with the rest being attributed to a possible 50bp cut. Overall, it appears that the change in the wording of the Fed’s accompanying statement opened the door even further for a rate cut in September as per the accompanying statement “there has been some further progress toward the Committee’s 2 percent inflation objective”. For next week, of interest may be the ISM non-manufacturing PMI figure for July which is expected to escape contraction territory and showcase an expansion in the non-manufacturing sector of the US economy. Such a scenario may aid the dollar, whereas any figure lower than the expected 51.0 could weigh on the greenback.

GBP – BoE cuts rates

Cable is about to end the week lower, and the pound is also weakening against the JPY but strengthening against the EUR. On a macroeconomic level, we note the UK’s final manufacturing PMI figure for July, which came in even higher than the preliminary figure at 52.1, implying a much larger expansion in the manufacturing sector of the UK economy. The continued expansion of the UK’s manufacturing sector may provide support for the GBP should further financial releases indicate a strong UK economy. On a monetary level, we note that the BoE cut interest rates as was expected by 25 basis points from 5.25% to 5%. However, despite the rate cut occurring as expected, the vote was much closer than what economists were predicting, with 5 members voting for a cut instead of 6 and 4 voting to remain versus the expected 3. In the bank’s accompanying statement, it was stated that “Inflationary pressures have now eased enough that we’ve been able to cut interest rates today”, implying that with inflation now being at the banks 2% inflation rate, policymakers found it prudent to cut interest rates. The rate cut tended to weigh on the pound following its release, as it marks the beginning of the BoE’s monetary easing cycle, with the bank now expected to cut two more times before the end of the year. Overall, the possibility of two more rate cuts by the end of the year may weigh on the pound. However, any deviation from the current market expectations may instead provide support for the GBP

JPY – BOJ hikes more than expected

The main characteristic of the JPY may have been its strengthening across the board for the week, in a sign of continued strength. The strengthening of the JPY appears to have been maintained since the market intervention by the Japanese government. We continue to maintain our view that there may be more way to go to push the JPY higher, yet that remains to be seen. On a monetary level we note that the BOJ took the markets by surprise and hiked more than what was expected, by increasing rates by 15bp instead of 10bp. The 15bp was unexpected and may showcase a more hawkish BOJ than many had anticipated, which in turn appears to have provided support for the Yen, as the BOJ’s rate hiking path appears poised to continue. As such, should BOJ policymakers and in particular BOJ Governor Ueda signal that the bank may aggressively hike interest rates in the future, it may provide support for the Yen. On a macroeconomic level, we had a few interesting financial releases stemming from Japan this week. Starting off on Tuesday, the unemployment rate decreased to 2.5% from 2.6% , whereas on Wednesday the preliminary industrial production rate and retail sales rate both for June, exceeded market expectations. The better than expected financial releases may imply that the Japanese economy is resilient both from a production and consumption standpoint, which have further aided the Yen. On the slide, some concern for the manufacturing sector may have emerged following the lower than expected Jibun Bank manufacturing PMI figure for July.

EUR – Stubborn inflationary pressures in the zone

On a fundamental level for EUR traders we note that the EU’s artificial intelligence act is now officially enforceable since Thursday. On a monetary level, we note that ECB as was widely relatively quiet this week and as such we will focus more on the macroeconomics. As such we turn our attention to Germany, who is one of the economic powerhouses in Europe. Stemming from Germany, the preliminary GDP rate for Q2 came in lower than expected an entered contraction territory, thus implying a slowdown in economic growth. Moreover, the preliminary HICP rates for July came in higher than the prior rate, implying an acceleration of inflationary pressures. Furthermore, this was true for the Zone as well whose preliminary HICP rates for July also accelerated to 2.6%. The acceleration on inflationary pressures in the Eurozone as a whole and Germany may increase pressure on the ECB to withhold from cutting interest rates anytime soon, which in turn may aid the EUR. Furthermore, despite the manufacturing PMI figure for the Eurozone and Germany for the month of July coming in higher than expected, it still remains in contraction territory, thus further dampening the economic prospects of the Eurozone. However, should the economic situation in the Eurozone worsen, the ECB may face increase pressure to cut interest rates in order to support the economy. In our view, the bank faces a difficult challenge ahead. For next week, of interest may the Eurozone’s sentix index figure for August.

AUD – RBA decision next week

On a macreconomic level, we note that Australia’s CPI rates for Q2 came in as expected at 1% on a quarteron-quarter level and 3.8% on a year-on-year level. The yoy rate showcased an acceleration of inflationary pressures in the Australian economy, as such it may increase pressure on the RBA to maintain its restrictive monetary policy until it has gained greater confidence that the battle against inflation is yielding results. On a monetary policy level, we highlight the RBA’s interest rate decision on Tuesday in which the bank is widely anticipated by market participants to remain on hold with AUD OIS currently implying a 93% probability for such a scenario to materialize. As such our attention turns to the banks accompanying statement where should it be interpreted as relatively in hawkish in nature and thus push back against the current market expectations of one rate cut by the end of the year, it may aid the Aussie and vice versa.We also note, as usual the deep economic ties between Australia and China on a fundamental level. Hence we that the release of the Caixin and NBS manufacturing PMI figures which were released earlier on this week. Both figures showcased a contraction in manufacturing activity in China, which may be a source of concern for Aussie traders, as a slowdown in manufacturing in China may imply a reduction in demand for raw materials stemming from Australia which in turn could weigh on the AUD.

CAD – Employment data next week

On a macroeconomic level, we note for the Loonie, that Canada’s GDP rate for May came in higher than expected at 0.2% versus 0.1%, implying an expansion of economic activity in the Canadian economy. The better than expected GDP rate on a mom level may have provided support for the AUD. Yet we should not that no other major financial releases stemming from Canada were seen during the week, with the exception of the manufacturing PMI figure for July which showcased a widening contraction in Canada’s manufacturing sector. Instead traders may be interested in next week’s release of Canada’s employment data, which should it showcase a loosening labour market, it may weigh on the Loonie and vice versa. On a fundamental level, we note that the recent geopolitical tensions stemming from the Middle East appear to have aided oil prices, which in turn may have provided some support for the CAD given Canada’s status as an oil exporting nation.

General Comment

As a closing comment, in the FX market we expect the USD to maintain some of its influence over other currencies as the frequence and gravity of US financial releases intensifies. Nevertheless, there are days in the calendar that could allow for other currencies to get the initiative and form their own course, thus creating a more balanced trading mix for market participants. As for US stockmarkets, we note that th downwards trajectory faced by the NASDAQ, S&P500 and Dow Jones 30 appears to be continuing their descent as the week comes to an end. We still maintain our concerns for the US stockmarkets and will continue to monitor them in the following week.As for gold prices we note that the recent geopolitical developments between Israel and Iran appear to have funneled safe haven inflows into the precious metal given its a status as a hedge during times of uncertainty. As such, should the two nations continue to edge closer and closer to a potential war, we may see gold’s price moving higher in the upcoming week

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