Monday, November 4, 2019

Earnings season comes into full effect this week; will the RBA hold rates?

  • Dollar
  • Gold
  • Euro
  • Pound
  • Stocks

Market recap: US-China trade optimism renewed yet again

The Chinese Commerce Ministry said on Friday that trade negotiators from the US and China have reached an agreement in principle regarding the ongoing trade dispute. The news reinvigorated investors, who are optimistic that “phase one” of the new trade pact actually will be finalised this month after all. US equities surged on Friday, reaching new highs. The DJIA soared 1.11% to 27,347.36, the S&P 500 advanced 0.97% to 3066.91, the Nasdaq spiked 1.13% to 8386.40.

US stocks kept their momentum, gaining for the second week in a row. The DJIA, S&P 500 and Nasdaq made gains of 1.44%, 1.46% and 1.74% respectively.

The US labour market performed better than expected in October, with NonFarm Payrolls increasing 128,000 from September, beating economists’ predictions of 85,000. The unemployment rate for October met expectations of 3.6%, although average hourly earnings increased 0.2% month-on-month, falling short of an expected boost of 0.3%. The US’ manufacturing sector continued to show contraction, with the Institute of Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) for October missing most economists’ predictions of 48.9 – instead, it only increased to 48.3, a small change from September’s 47.8 level. The Dollar Index fell for the fifth consecutive trading session as a result, losing 0.12% on Friday.

Safe haven assets remained mostly flat. Gold gained 0.09% and the yen fell 0.15% against the greenback. US Treasury yields rose, with 10-year yields gaining 2bps to 1.71%.

Meanwhile in Asia, the Nikkei, Hang Seng and Straits Times Index made weekly gains of 0.22%, 1.63% and 1.38% on Friday. On Monday, the Hang Seng Index and Straits Times Index started trading 0.73% and 0.26% higher. The Tokyo Stock Exchange will be closed today, in observance of Culture Day in Japan, and will reopen on Tuesday.

In the week ahead, the Royal Bank of Australia (RBA) and the Bank of England will be announcing their decisions on monetary policy. Earnings season will also continue, with reports coming from the likes of financial behemoths Berkshire Hathaway, SoftBank, Société General and Prudential, plus tech giants Qualcomm, Roku and Activision Blizzard, and finally carmakers BMW, Toyota and Honda.

Today’s analysis: Expect the Aussie to be little changed after Tuesday’s policy decision

Futures tracking RBA interest rate decisions indicate that the market has priced in a 93% probability that Australia’s Official Cash Rate (OCR) will be left unchanged at 0.75%, an increase from a 53.2% probability on October 4th. In October’s monetary policy meeting, the RBA cut rates by 25bps to a record low 0.75%. RBA officials justified the decision to cut rates, highlighting increased global downside risk and a weakening economy. October’s monetary policy statement also indicated that the central bank is willing to hold low rates for an extended period and is prepared to further ease monetary policy if needed.

Since October’s meeting, Australia’s domestic economy has strengthened slightly. Inflation for Q3 increased to 1.7% year-on-year, meeting economists’ expectations. The unemployment rate for September reduced to 5.2% (although still short of its 4.5% target) and the Manufacturing Purchasing Managers’ Index (PMI) was 50.0, beating expectations.
Also, since the Fed has signalled it will likely stop making changes to monetary policy in the short-term, currencies should experience greater stability as well. This gives the RBA little reason to decide on a rate cut or hike during Tuesday’s monetary policy meeting.

While we expect the RBA to keep rates unchanged, AUD/USD will likely remain little changed after the announcement (due to the market pricing in a 93% probability for unchanged rates). As a result, expect AUD/USD to range between 0.6912 and 0.6932. But if RBA officials decide on a rate cut, AUD/USD may possibly break past 0.6887’s level to range between 0.6857 to 0.6887. AUD/USD will likely also be affected by movements from the dollar, as the US and China are expected to sign the agreement on the first phase of its trade pact this month.

The RBA is likely to hold rates while signalling a possible future rate cut

Bulls continue to charge forward before RBA's monetary policy decision on tuesday (H4)

Bulls continue to put upward pressure on AUD/USD, and will likely continue as positive news from the US-China trade dispute weakens the greenback. If the RBA decides to leave rates unchanged during its monetary policy meeting on Tuesday, then expect the bulls to retest and possibly break past the resistance level of 0.69257. But bears are likely to put up a fight, keeping AUD/USD ranging between 0.6912 and 0.6932.