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FX: RBA Preview, G20, OPEC

  • Kathy Lien
  • 2 July 2019

Daily FX Market Roundup July 1, 2019

 

The G20 summit ended with a trade truce between the US and China.President Trump and President Xi agreed to restart talks with Trump promising to hold back additional tariffs and allow US companies to sell their equipment to Huawei while discussions are underway. In return China agreed to resume purchases of American goods and buy a "tremendous amount" of American food and agricultural products. The US dollar soared in response but the sell-off in the euro, Australian and New Zealand dollars is a sign that the broader market is not convinced that it will be blue skies from here.

The problem was that a trade truce is not the same as a trade deal.Until tariffs on China are reduced or eliminated the world's second largest economy faces serious economic challenges. Investors are worried that if China sneezes the rest the world will catch a cold and we are seeing plenty of evidence of that possibility as manufacturing activity in Australia, UK and the Eurozone slow. The US on the other hand is the only one that benefits from tariffs and a half-hearted commitment to restart trade talks. We see that in the data with manufacturing activity in the US exceeding expectations when everyone else misses. In other words, President Trump's trade tantrums hurt everyone else more than the US, which is part of the reason why the US dollar is up across the board today.

The Reserve Bank of Australia meets tonight and before sharing our outlook, OPEC's decision to extend its production cut to at least the end of 2019 is great news for oil.However the 1.7% rise in crude prices provided very little support to the Canadian dollar. USD/CAD sold off sharply last week and is due for a recovery. The rally in the US dollar provided the perfect catalyst for a move that took USD/CAD above 1.31. This is a big week for Canada with trade, IVEY PMI and labor market numbers scheduled for release.

But in the near term, the main focus will be tonight's RBA rate decision.After rising 8 out of the last 9 trading sessions, AUD/USD pulled back sharply on Monday. The Reserve Bank of Australia is widely expected to cut interest rates by 25bp so the key question is what happens next - do they shift from dovish to neutral bias or they leave the door open to additional easing? Judging from the recent gains in A$, investors don't expect the RBA to be excessively dovish because the market is only looking for one more move from the central bank this year.

At the start of last week, RBA Governor Lowe openly mused about the effectiveness of more rate cuts if "everyone is easing."This is an awkward comment because while it may be true that contemporaneous reduction in rates could result in exchange rate parity, lower borrowing costs goes a long way in helping businesses and consumers domestically. According to the table below, the RBA could wait for more evidence before easing. Retail sales and manufacturing activity are weak but the labor market is strong and activity in the service sector is growing.

 

There are 3 possible scenarios for RBA -

 

1) RBA cuts 25bp, signals they are satisfied with the moves taken so far, no more is needed = AUD/USD to .7050

2) RBA cuts 25bp, says more easing may be needed = AUD/USD below .6900

3) RBA keeps rates unchanged, pushes cut to next meeting = AUD/USD to .7050

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.