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RBA expected to keep rates on hold

BY BRETT OTTAWA

Despite a PMI number from China which showed firms had reported a slight increase in the production of new orders for the month of June the Australian dollar has struggled to consolidate its monumental gains over the past 24 hours. Losing 0.25 percent versus its US Counterpart to start the second half of 2017, underlying Greenback strength has kept any potential AUD advances well under wraps. Opening this morning marginally weaker at a rate of 0.7658, markets are expected there first dose of volatility at 11:30am as investors await the release of retail sales numbers from June. From there it will be all about the RBA who meets at 2:30pm. Whilst no change in the official cash rate is expected, any hawkish tones linked to tighter policy moving forward would again re-ignite AUD buying interest. 

In a session dominated by the strength of the world’s reserve currency, the US dollar rose as factory data bolstered optimism surrounding the American economy. Whilst liquidity levels remained low in recognition of the July 4 US holiday, to a large extent the biggest dollar rally in two weeks caught investors off guard as recent macro strength supported the hawkish shift delivered by the FOMC last week. Unable to keep pace the New Zealand dollar touched lows of 0.7272 yesterday opening this morning lower as it currently buys 72.92 US Cents. 

The Sterling fell slightly in overnight trading, shedding 0.7% against the USD to start this morning at 1.2940. The reversal was driven by a number of factors both at home and abroad with particular insight spurred by a lacklustre Markit Manufacturing PMI. Coming in under expectation, the GBP retreated initially, cooling down hopes for an unwinding of accommodative monetary policy that the Bank of England’s Governor Carney hinted was a possibility. With the broader narrative of adequate economic growth signalling the possibility of a rate hike now possibly premature, investors turn to further clues throughout the week. The most immediate entries on the economic calendar being the Construction PMI numbers on Tuesday and the Services PMI data on Wednesday.

The US dollar strengthened overnight against its major counterparts. The lift in the US dollar coincided with strong US economic data, with US manufacturing activity (ISM) surging from 54.9 to 57.8, which was a three year high and expanding for the 97th consecutive month. 10-year US treasury yields rose to 2.35, which was a two-month high. The EUR/USD pair fell to an overnight low of 1.1355 after reaching a year high of 1.1445 late last week. The Pound Sterling also fell to a low of 1.2931 against the Greenback which was the lowest level in a week. With the upcoming Independence Day holiday in the US today (US markets closed) all eyes will be on Australia’s May retail sales report and Reserve Bank of Australia’s (RBA) July monetary policy meeting.