Analysis by OnEquity / Outlook for the Week

[OnEquity]

Outlook for the Week of August 05-09​

Key points to watch out for:

• Reserve Bank of India sets monetary policy as bullish bets disappear
• BoJ’s summary of views awaited as it looks for more signs of hikes
• After the Fed, the dollar eyes ISM non-manufacturing PMI data
• New Zealand and Canadian employment data are also on tap for the week

Will the Reserve Bank of Australia Turn to a Dovish Course?​

After the decisions of the Bank of Japan, the Federal Reserve, and the Bank of England last week, the central bank torch will be passed to the Reserve Bank of Australia, which will announce its decision on Tuesday, August 6.

At its last meeting, the RBA kept its benchmark rate unchanged at 4.35%, although it debated whether to raise it by another 25 basis points due to inflation softening much slower than estimated.

Following the meeting, the monthly year-on-year CPI for May registered an increase to 4.00% from 3.60%, raising estimates for another quarter-point rise by the end of the year, while the employment report pointed to a much stronger-than-expected increase in employment in June.

However, inflation data for the aggregate relative to the second quarter showed that, although headline inflation rose from 3.6% to 3.8% y-o-y, the more closely watched underlying indicators eased. This, together with growing concerns about the evolution of the economy in China, has caused investors to remove their bullish bets and begin to estimate reductions. Currently, a 25 basis point reduction in December appears to be fully discounted.

Given all of the above, even if the RBA is much more dovish at this week’s meeting, it is unlikely that they will do a U-turn and start to communicate a rate cut. They may opt for a more neutral stance and indicate that they want more evidence that inflation has returned to the downward path. This could disappoint market participants who are expecting more signals related to a possible rate cut, which would give the Australian dollar a chance to regain some of the ground it has lost recently.

Could the BoJ’s Summary Add More Fuel to the Yen’s Engines?​

On Thursday, August 8, the Bank of Japan will release the summary of views from last week’s meeting, at which policymakers decided to raise interest rates by 15 basis points when market participants gave a slightly less than 50% probability of a 10 basis point hike. Officials also concluded to gradually reduce the pace of their monthly bond purchases by about 3 trillion yen by April 2026.

This served to prolong the yen’s latest rally, possibly triggered by a wave of risk aversion and the unwinding of profitable carry trades. Should the summary of views show that policymakers are poised to continue raising interest rates before the end of the year, the yen could remain at the forefront, even though the rally already appears to be overstretched.

ISM Non-Manufacturing PMI in Focus as Traders Point to a Fed Rate Cut​

In the US, the Federal Reserve was the only bank to leave interest rates unchanged last week, with Chairman Jerome Powell indicating that a rate “cut could be on the cards for the September meeting.” Officials also highlighted the progress of inflation towards its target, prompting participants to add a few extra basis points to rates by the end of the year. Although a September rate cut was already taken for granted before the decision, investors are now expecting three quarter-point rate cuts by December.

On Monday, August 5, dollar traders will pay close attention to the July ISM Non-Manufacturing PMI for more signals on the performance of the world’s largest economy. The prices charged sub-index could attract specific attention, as it could serve as an early indication of whether inflation continued its downward trajectory. The employment index could also be particularly closely watched in the wake of the latest softening of the labor market.

Employment Data from New Zealand and Canada Also on the Agenda This Week​

Employment data from New Zealand and Canada are also on this week’s agenda. New Zealand’s data is scheduled for Wednesday, August 7, and Canada’s for Friday, August 9.

To start with New Zealand, the RBNZ made a U-turn in its July decision after keeping the door open for a rate hike in May, by mentioning that it expects headline inflation to return to within its target range of 1% to 3% in the second half of 2024.

A few days later, second-quarter inflation data showed headline CPI declining to 3.3% y-o-y from 4.0%, corroborating the view that the Bank could begin lowering interest rates almost immediately. Money markets indicate that investors expect more than two quarter-point rate cuts this year, with the first one in August likely to be around 35%. If employment data shows that the unemployment rate increased for the fifth quarter in a row, that possibility could increase even further, putting more pressure on the already battered New Zealand dollar.

Now focusing on Canada, the BoC has been one of the most pessimistic of the major central banks, having cut interest rates twice and indicated that a third consecutive 25 basis point cut could be forthcoming. An unflattering employment report could finalize the deal.

In addition to domestic data, both the Australian dollar and the New Zealand dollar could be directly affected by the Chinese trade and July CPI data on Thursday, August 8, and Friday, August 9, respectively. Any data that increases concerns about developments in the world’s second-largest economy could weigh on both of these highly risk-linked currencies.

On the earnings front, Disney will announce its results on Wednesday, August 7, before the market opening.