Australia Cuts Interest Rates to a Record Low as Global PMI Falters

Daily Analysis - 02/08/2016

Australian Dollar Holds Steady Against Majors After RBA Slashes Rates By Another 0.25%

The Australian dollar held its ground versus most major peers after the Reserve Bank of Australia cut its benchmark interest rate to a record-low for the nation. The rate cut was widely anticipated after rates were slashed back in May from 2.00% to the 1.70% where it stood before the latest decision was announced this morning. Although Australia’s housing market continues to boom while unemployment stands at a modest 5.80%, consumer price inflation continues to trend to the downside, remaining ‘quite low’ and concerning policymakers. As a result, the move to lower interest rates was deemed the appropriate action, with market participants readily expecting the change. The lack of movement in the Aussie dollar compared to the US dollar underscores policymakers concerns about the overvalued nature of the Australian currency, with the AUDUSD little changed at 0.7542 after dropping as low as 0.7492 following the announcement.

RBA Decision a Possible Move to Curb Deflation

As Australia’s Central Bank cuts interest rates to an all-time low, the reasons of the historic move were answered during the RBA Rate Statement that followed the decision from the Monetary Policy Committee. RBA Governor Glenn Stevens stated, “recent data confirmed that inflation remains quite low.” With interest rates low and the Australian dollar remaining elevated according to officials, an aggressive action was merited in order to protect the nation from the potential impacts of deflation. Chief economist at AMP Capital Investors Shane Oliver remarked, “with the inflation numbers so low and the risk that if they didn't cut that the Aussie dollar would have been 76-77 cents by now, they felt they probably had to act."

US Manufacturing Falls Short of Meeting Estimates

The manufacturing sector in the US expanded less than anticipated according to figures from the month of July, missing expectations. According to the Purchasing Managers’ Index released by the Institute of Supply Management, the manufacturing sector index came in at 52.6, just shy of the forecast of 53.0. This should come as a concern as this composite index is based on five indicators, one of which is the employment component which accounts for 20.0% of the aggregate figure. The sub-par performance of the PMI has raised concerns that the upcoming ADP Employment change figure due on Wednesday and as well of the NFP on Friday could be impacted by weaker manufacturing labor market fundamentals.

After-shocks of Brexit Continue as PMI Under Preforms

The shock-waves of the ‘leave’ decision following June’s British referendum continue to spread for the United Kingdom after the latest data from the manufacturing sector showed signs of contraction. The UK Manufacturing PMI, the index that measures the activity level of purchasing managers in the manufacturing sector, reportedly fell to 48.2, well short of analyst projections of 49.1. Even though the Pound took a dive after the bearish data for the manufacturing sector was announced, Sterling has started off strong during early trading on Tuesday in anticipation of the Constructions PMI set to be released at 9:30 GMT.

German Manufacturing Eclipses its Forecast

Needed good news came earlier from Germany after its latest release of manufacturing data for the nation. The manufacturing PMI managed to beat the consensus estimates, printing at 53.8, just a hair above the forecast of 53.7. Even though the change is minuscule, it is seen as a good sign, especially ahead of the upcoming German Composite PMI and Services PMI set to be reported during the morning session on Wednesday.