The Week Ahead: RBNZ Expected To Deliver A Rate Cut, Trade Concerns Reignited


After last week's fireworks, it should be a quieter week for risk events, on the calendar at least. We have a couple of antipodean central banks to watch out for, with the RBNZ expected to deliver a 25bp interest rate cut, even allowing for better first quarter growth numbers, and leave the door open for more. GDP data out of Japan and the UK will also be in focus.

After delivering 50bps of monetary easing in the past two months and recent stronger-than-expected Q2 CPI, the RBA will keep its cash rate at an historic low of 1%. The focus will be on its forward-looking language, which will likely reiterate the pledge to adjust rates again to further support inflation. The battered Australian dollar is unlikely to find much support from this pause and will continue to suffer from the new tariff-induced risk-off mood. 

The FOMC and President Trump stole the show last week, the former delivering a 25bp cut, the latter a new 10% tariff on $300bn of imports from China. However, the Fed declined to signal further rate reductions – Chair Powell said that this was a “mid-cycle adjustment” and “not the beginning of a long series of rate cuts.” This guidance disappointed markets, which tempered their expectations for FOMC easing, hitting equity prices and strengthening the dollar.

Yet, only a day later, Trump announced new tariffs and markets are again looking for the FOMC to deliver an extra three cuts. Yields have dropped sharply with this double hit and posted their largest weekly declines since December 2014. The yield on the US 10-year is down over 20 basis points over the past five sessions to its lowest level since 2016.

Risk aversion certainly dominated Friday's sessions with the weekly falls in US stock markets on track to be their worst this year, while the safe haven JPY and CHF were very strong outperformers last week of the major currencies.

They have continued strengthening overnight, as the Chinese government has asked its state-owned enterprises to halt imports of US agricultural products. Furthermore, the yuan has made a spectacular 1.5% drop this morning, pushing USD/CNY above 7.0 for the first time in a decade. It seems the Chinese are not backing down at all and this is a clear escalation in the trade war.

We saw aggressive breakdowns in GBP, AUD and JPY last week so we will be focusing on whether these currencies especially can consolidate these moves lower. Regarding sterling, in amongst all the headline havoc and no-deal concerns, we note that now that the Fed has started cutting rates, this usually leads to cuts from the Bank of England 6 to 9 months later. In fact, the Fed has never cut rates without a follow-on cut from the BoE within 12-14 months.

Here's what to look out for on the calendar across global markets this week:

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