Australian Dollar Rises Despite Weak PMI Data, Supported by China's Rate Cut
In a quiet Asian trading session today, the Australian Dollar managed to make modest gains, even in the face of disappointing PMI data from Australia. With Japan observing a holiday, market movements were limited; however, a prevailing risk-on sentiment helped to mitigate some of the adverse effects stemming from the weak economic indicators. Meanwhile, both the Yen and Swiss Franc continued their recent downward trends. Overall, the market sentiment remains buoyed by the Federal Reserve's rate cut from last week.
A significant boost to market sentiment came from China's central bank, which unexpectedly reduced its 14-day repo rate by 10 basis points. This decision surprised many, especially after the People's Bank of China refrained from cutting longer-term rates just last Friday. Investors are now keenly awaiting a scheduled press conference tomorrow featuring China's top three financial regulators, which has raised hopes for more comprehensive and substantial stimulus measures.
As the day progresses, market attention will shift towards PMI releases from the Eurozone, the UK, and the US. These figures are anticipated to provide clearer insights into the health of key global economies and could influence broader market movements. Additionally, traders are also looking ahead to the upcoming rate decisions from the Reserve Bank of Australia (RBA) and the Swiss National Bank (SNB) later this week.
On the technical front, Gold continues its record-breaking rally, with expectations for further increases projected from 2364.18 to 2531.52, following a rise from 2471.76 to 2639.10. Initial resistance may limit upside attempts, but a decisive break above 2639.10 could trigger an acceleration towards the 161.8% projection at 2742.51.
In Asian markets, Japan is on holiday, while the Hong Kong HSI has risen by 0.82%, the Shanghai SSE is up 0.74%, and the Singapore Strait Times has increased by 0.58%.
Australia's economic activity showed signs of slowing in September, with the Judo Bank Manufacturing PMI falling to 46.7, its lowest level in 52 months, down from 48.5 in August. The Services PMI also declined to 50.6 from 52.5, and the Composite PMI slipped back into contraction, dropping from 51.7 to 49.8, marking an eight-month low.
Matthew De Pasquale, an economist at Judo Bank, commented that the recent PMI weakness indicates households are saving more of the government stimulus than previously expected. He noted that the economy is gradually balancing supply and demand, which supports the case for maintaining the current cash rate rather than increasing it later this year.
Employment growth appears to be slowing, with the employment index barely in expansion at 50.8. Additionally, the output price index, which tracks businesses raising consumer prices, reached its lowest level since January 2021. Although input prices have decreased, they remain above pre-pandemic averages, indicating ongoing inflationary pressures.
In New Zealand, the goods trade balance recorded a deficit of NZD -2.2 billion, significantly larger than the anticipated deficit of NZD -155 million. This widening gap is attributed to a slight decline in both goods exports and imports. Goods exports fell by NZD -6.1 million, or 0.1% year-on-year, to NZD 5.0 billion, while goods imports decreased by NZD -70 million, or -1.0% year-on-year, to NZD 7.2 billion.
The decline in exports was primarily due to weaker trade with China, New Zealand's largest trading partner, where exports fell by NZD -195 million, or 16% year-on-year. In contrast, exports to other key markets saw increases, with shipments to Japan rising by 39% year-on-year, while exports to the US and the EU grew by 3.1% and 5.9% year-on-year, respectively.
On the import side, New Zealand saw notable declines in the value of goods imported from China, the EU, and Australia, with decreases of -6.4%, -8.2%, and -12% year-on-year, respectively. However, imports from the US and South Korea surged, with goods from the US increasing by NZD 154 million (24% year-on-year) and imports from South Korea rising by NZD 185 million (39% year-on-year).
This week, two major central banks are set to make key monetary policy decisions. The RBA is expected to maintain its current stance, while the SNB is anticipated to continue its easing cycle. However, the SNB faces pressure to weaken the Franc, raising the possibility of a more aggressive rate reduction. Markets are also preparing for global PMI releases and important economic data from the US, Canada, and Japan.
The RBA is widely expected to keep its interest rate unchanged at 4.35% this week. While the central bank has not ruled out further rate hikes, the consensus among economists suggests that the next move will likely be a reduction. However, there is no clear agreement on the timing of this anticipated rate cut.
Major Australian banks offer differing predictions on when the first rate cut will occur. The Commonwealth Bank, which previously forecasted a November cut, has revised its outlook to December due to recent employment growth. Westpac and ANZ anticipate a cut in February 2025, while NAB is the most cautious, projecting a cut in May next year. This divergence among the big four banks underscores the uncertainty surrounding the RBA's next steps.
This week's monthly CPI report from Australia may provide some short-term relief to the RBA, with inflation expected to drop significantly from 3.5% to 2.8% in August. However, the more critical figure will be the quarterly CPI data, set to be released on October 30.
The RBA's November meeting, which will include both the quarterly CPI and fresh economic projections, is viewed as a pivotal moment. By then, the central bank will have a clearer understanding of whether inflation is moderating sufficiently to justify a rate cut in early 2025.
Conversely, the SNB is expected to cut interest rates this week, though the extent of the reduction remains uncertain.
While the Swiss Franc's appreciation has eased since August, it remains at historically high levels, posing challenges for Switzerland's export-dependent economy. Outgoing SNB Chair Thomas Jordan has voiced concerns about the negative impact of the Franc's strength, with Swiss exporters increasingly urging the central bank to take more aggressive action, adding urgency to the SNB's decision-making process.
The prevailing expectation is that the SNB will implement a 25 basis point rate cut, reducing the policy rate to 1.00% this week, with another 25 basis point reduction anticipated in December. However, given the economic pressures and the need to weaken the Franc, some economists believe there is a significant chance that the SNB could opt for a larger, 50 basis point cut at this meeting.
On the data front, attention will be focused on PMI data from major economies at the start of the week. Particular scrutiny will be on the Eurozone and Germany, as the German economy faces significant recession risks, and any further decline in its PMI figures could exacerbate these concerns. In the US, several key economic reports are set to capture market attention, including consumer confidence, durable goods orders, and the closely monitored PCE inflation data. Additionally, Canada's GDP data and Tokyo CPI from Japan are also on the radar.
Key highlights for the week include:
Monday: New Zealand trade balance; Australia PMIs; Eurozone PMIs; UK PMIs; Canada new housing price index; US PMIs.
Friday: Japan Tokyo CPI; France consumer spending; Germany unemployment; Canada GDP; US goods trade balance, personal income and spending, and PCE inflation.
The EUR/AUD pair has dipped notably after a recovery was capped below the 55 4H EMA, but remains above the temporary low of 1.6315. The intraday bias remains neutral for now. While consolidation from 1.6315 may extend, the risk continues to lean towards the downside as long as the resistance at 1.6629 holds. A drop below 1.6315 would prompt a retest of 1.6256. A firm break below this level would resume the overall decline from 1.7180, targeting the 61.8% projection of 1.7180 to 1.6256 from 1.6629 at 1.6058.
In the broader context, the outlook is mixed due to the deeper-than-expected fall from 1.7180. However, as long as the support at 1.5996 holds, the uptrend from 1.4281 (2022 low) is still favored to resume at a later stage. A firm break of 1.7180 would pave the way for the 61.8% projection of 1.4281 to 1.7062 from 1.5996 at 1.7715.