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Australian Policymakers Remain Decidedly Dovish

Daily Analysis - 19/07/2016

Anticipation of Further RBA Policy Easing Sends the Australian Dollar Sharply Lower

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Citing both external and internal conditions, the Reserve Bank of Australia’s Minutes from the latest monetary policy meeting held earlier in the month foreshadowed the probability of further interest rate cuts.  As the economy contends with slower growth in trading partners, decelerating inflation, and a higher Australian dollar, speculation is growing that policy loosening could come as early as August.

RBA Minutes Underline Risk Factors


During its latest meeting, the Reserve Bank of Australia discussed numerous developments both domestically and abroad as anticipation grows that the Central Bank will be forced to ease monetary policy further during the second half of the year to accommodate the economy.  With conditions in many major trading partners deteriorating on the basis of industrial production and commodities demand, the outlook for the nation remains fragile. While the “Brexit” decision was discussed, because the two nations have very limited bilateral trade, the referendum results were expected to have very little impact on forward expectations for the economy.  However, weak inflation which remains below the target range combined with mixed employment and housing data are giving way to speculation that another 25 basis points will be slashed from the key rate in the coming months.  The Australian dollar fell after the publication, with AUDUSD managing to hold the 0.7500 level.

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Oil Prices Slip on Renewed Oversupply Fears


Even though US production continues to slide as shale producers are gradually forced to cease operations amid higher breakeven costs, the expiration of hedges designed to protect against price declines, and problems paying back borrowings, oil prices are once again tumbling. While the market managed to find a temporary equilibrium after several pronounced supply disruptions and higher demand due from Chinese refiners, stockpiles are once again expected to rise.  One of the main drivers of this decline in prices is the overflowing amount of refined gasoline and other distillates which are not being consumed.  Additionally, with supply disruptions gradually dissipating, fears have been once more revived that total onshore storage could completely fill, creating the conditions for a major correction lower in prices.  WTI crude oil futures are currently hovering near the $45.00 per barrel level with any hints of growing supply to dent prices further.

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Yen Strengthens Despite Rising Stimulus Speculation


Expectations are rising that the Japanese government is preparing further stimulus measures for the economy following the sweeping election wins earlier in the month as Abe and his cabinet signal markets of their expansionary intentions.  Although aggressive easing measures including quantitative easing and negative interest rates have helped keep the Yen weaker versus peers, supporting the export economy, the program has failed to keep inflation elevated, with the economy once more in the throes of deflation.  While in theory all these measures are effective when it comes to restoring inflation and growth, the issue facing Japanese policymakers is that many advanced economies are pursuing the same strategy, reducing the effectiveness for all parties.  After falling nearly -5.00% versus the US dollar since the election results were tallied, the Yen is modestly stronger on the session, potentially giving way to a pullback in the USDJPY pair following the recent rally.

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Bank of American Earnings Give Way to Cost Cutting Optimism


After experiencing weaker revenues from interest income which remains stubbornly low amid the Federal Reserve’s loose monetary policies, the latest earnings report released by Bank of America underlined these issues after profits fell -18.00% from the same quarter in 2015.  Revenues slid by -7.00% during the same period, however, the Bank did manage to beat the consensus expectations for the bottom line after announcing earnings per share of $0.36 versus estimates of $0.33.  Helping shares to climb after the disappointing top and bottom line figures was the announcement of further cost cutting measures to the tune of nearly $5 billion by 2018.  The biggest development for diversified banking operations such as Bank of America however, was the recently proclaimed change in the Republican party platform calling for a return of Glass-Steagall. Should it be reinstated, it could lead to a breakup of Bank of America Merrill Lynch.

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