Australia Cuts Interest Rates by 25bps

Daily Analysis - 03/05/2016

Australia Cuts Interest Rates by 25bps


The Reserve Bank of Australia in its meeting today cut interest rates by 25bps, bringing the interest rate to 1.75% from 2.0% previously. The central bank lowered rates in response to what they considered as weak inflation in the first quarter. The RBA last cut interest rates in May of 2015. The Aussie dollar fell on the news surprising markets that were expecting to see the RBA hold interest rates steady at today’s meeting.

Eurozone Manufacturing PMIs Show Mixed Results

The manufacturing PMI in the Eurozone as reported by Markit was revised higher to 51.7 from 51.5, signaling a slight improvement in the manufacturing sector with output and new orders expanding at a moderate pace. However, the PMI reading was still the weakest in a year. The PMI for the manufacturing sector reflects the view of purchasing managers of factories in the euro zone on the status of sales, employment and the general economic outlook. Eurozone countries' individual PMI's were also released with the Spanish PMI rising to 53.5 in April from 53.4 in March, while the French PMI slumped to 48 from 49.6 previously. Italy's PMI was higher, rising to 53.9 from 53.5 while Germany’s PMI was up to 51.8 from 50.7 previously.


Draghi: Structural Changes Needed to Raise Interest Rates

ECB President Mario Draghi and executive board member Benoit Coeure spoke on Monday in Frankfurt but offered little ammunition in terms of talking down the euro. Coeure said that the Eurozone’s growth momentum could start to slip if not backed by reforms, in reference to last week's report on a 0.60% increase in Eurozone GDP for the first quarter in 2016. Mario Draghi on the other hand stated that in his view low interest rates were not a problem but that they reflected weak demand in investment and noted that structural rebalancing was needed to raise real interest rates. EURUSD was trading at $1.150 as Draghi spoke. Last Friday, the US Treasury Department released its semi-annual currency report where it named Japan, South Korea, Taiwan, Germany and China as economies that relied heavily on currency intervention to keep their exports competitive while hurting the US and global economic growth. Excessive devaluations could trigger the US Treasury to take punitive action against these countries.


US ISM Manufacturing Moving Towards Contraction

The ISM manufacturing PMI in the US fell to 50.8 in April down from 51.8 in March when the ISM gauge increased for the first time in five months. April's ISM dip missed analyst expectations of a decline to 51.4 on the month. The declines came as assembly lines scaled back their activity more than expected, but overall, the manufacturing PMI remained in a borderline expansionary mode.  The new orders index fell 2.20 percent points to 55.8% from March's 55.30%, while the employment index increased 1.10 percent points to 49.2% in April, up from March's 48.1%. In the April ISM report, 11 out of 18 manufacturing industries reported mild growth in April while 4 reported a contraction.


New Zealand Unemployment Rate Expected to Tick Higher

Quarterly employment data from New Zealand is due later today for the first three months of the year. The unemployment rate is expected to rise to 5.50%, up from 5.30% in the previous quarter last year with the labor force participation rate expected to increase, pushing the unemployment rate higher. The labor cost index is expected to remain subdued, rising only 0.30%. With the RBNZ leaving rates steady at its meeting last week a surprise improvement in the labor market data could keep NZDUSD bullish in the near term while also easing pressure on the RBNZ for further rate cuts.


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