Aussie climbs after RBA minutes, WH denies fiscal easing idea

Summary:

  • Australian dollar leads the gains in G10 following the RBA minutes as exporters hedge their positions
  • PBoC’s Vice Governor suggests there is space for interest rate cuts including RRR, but this space is not as big as people thought
  • White House denies revelations about a payroll tax cut aimed at averting an economic slowdown, Donald Trump urges the Fed to a 100bps rate reduction

Aussie on top

Minutes from the latest Reserve Bank of Australia meeting supported the Aussie dollar which is leading the gains in the morning. The account suggested the central bank would consider further policy easing if needed, however, before doing so it would assess developments in both domestic and global economies. On top of that, the document pointed out that it was reasonable to expect an extended period of low interest rates and that risks to the Australian economy were tilted to the downside in the near-term and more balanced further out. The minutes also reaffirmed a better outlook for economic growth on the back of the latest two back-to-back rate reductions, tax cuts as well as infrastructure spending. In terms of inflationary pressures the RBA stuck to the view that there were few signs of emerging such pressures and there were downside risks to some CPI components. This outcome is to stem from the fact that there is more spare capacity in the domestic labour market than previously thought, hence wage growth has yet to increase notably. The Aussie dollar benefited from the release as exporter chose to hedge their positions, as Bloomberg reported. The AUD is rising 0.35% against its US counterpart this morning, it has been additionally propped up by upbeat sentiment across Asian equity markets where buyers have prevailed so far with the South Korean KOSPI rising as much as 1.2%, the best performance in Asia. 

Space for rate cuts, (no) fiscal easing in the US

During Asian hours trading we were offered a speech from PBoC’s Vice Governor Liu who suggested that there was room for interest rate cuts including RRR, however, this space was not as big as people thought. He also referred to the loan prime rate (LPR) reform - the Chinese central bank set the reference rate for the first time after a revamp on Tuesday - suggesting that the country still needed time to observe the effects of this reform. According to Liu, current interest rate differentials do not pose pressure on the yuan implicitly signalling that the latest CNY devaluation was mainly due to a strong demand for the greenback arising in the aftermath of a trade war escalation. 

On top of that, some revelations regarding a possible payroll tax cut in the US had occurred during Asian hours trading, however, there were denied by a White House official. Information was brought by Washington Post suggesting that possible payroll tax cuts would avert a potential downturn by bolstering consumer spending. The White House official also added that “More tax cuts for individuals are being discussed, but payroll taxes aren’t under consideration at present,” Let us remind that American people pay a 6.2% payroll tax on their income, which is used to finance social programs. Meanwhile, US President Donald Trump called on the Federal Reserve to cut rates by 100 basis points “over a fairly short period of time” and suggested the central bank should consider some quantitative easing as well.

The South Korean KOSPI (KOSP200 - CFD contract) has broken through its short-term resistance localized nearby 256 points. Source: xStation5

In the other news:

  • Fed’s Rosengren still wants more evidence of a slowdown to justify further rate cuts signalling he is likely to dissent when other FOMC members back a rate cut at a meeting next month

  • China is reportedly considering allowing provincial governments to issue more debt for infrastructure investment, according to Bloomberg

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