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Risk aversion was the name of the game in early Asian session trading, but traders soon kept calm and traded on as relatively strong reports came out.

  • AU AIG manufacturing index inches up from 55.0 to 56.0 in July
  • Japan’s final manufacturing PMI revised lower from 52.2 to 52.1
  • Caixin manufacturing PMI hits 4-month high
  • RBA keeps rates unchanged as expected
  • RBA: higher exchange rate to contribute to lower growth, inflation
  • RBA: growth in housing debt outpacing growth in household income
  • BOJ core CPI (y/y) up to 0.3% vs. 0.2% expected, 0.3% previous

Major Events/Reports:

China’s Caixin manufacturing PMI

Data from the world’s second largest economy saw sentiment among small and mid-sized businesses improving in July.

China’s Caixin/IHS Markit manufacturing PMI clocked in at 51.1 in July, which is not only better than the expected 50.5 reading but also marks the highest release in four months.

Global demand kept businesses happy as output and new orders boosted the report while input and output prices also rose to four-month highs. The report is consistent to yesterday’s official manufacturing and services PMIs, which also reflect resilient global demand.

Not surprisingly, the better-than-expected report boosted the Aussie across the board even as Aussie traders prepared for the RBA’s potentially dovish announcement.

RBA keeps rates on hold

As expected, the Reserve Bank of Australia (RBA) kept its monetary policies steady for an 11th straight month. Also as expected, Governor Philip Lowe and his team didn’t pass up the opportunity to talk down the Australian dollar.

In its monetary policy statement, the RBA maintained that the economy will grow at an annual rate of 3.0%. It expressed concern over domestic consumption, however, saying that retail sales have picked up but that “slow growth in real wages and high levels of household debt are likely to constrain growth in spending.”

Prospects aren’t looking better for consumption since the RBA believes that “wage growth remains low and this is likely to continue for a while yet” even as the unemployment rate is expected to decline over the next couple of years.

The housing market isn’t faring much better. While the central bank thinks that high prices are starting to ease, it also revealed that, in eastern capital cities, “considerable additional supply of apartments is scheduled to come on stream over the next couple of years.” More importantly, the RBA still believes that “Growth in housing debt has been outpacing the slow growth in household incomes.”

Lowe and his team are pretty chill over inflation, though, as they believe that it’s broadly as the bank expected. Apparently, high prices for electricity and tobacco are somewhat offset by increased competition in the retail industry.

But what really caught the market’s attention is the RBA’s remarks on the Australian dollar.

While analysts had already expected a bit of jawboning, they didn’t expect that the central bank would print that a strong Aussie “is expected to contribute to subdued price pressures in the economy,” adding that “it is also weighing on the outlook for output and employment.

The cherry on top of the statement is the statement that “An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.” Yikes!

Major Market Mover(s):

AUD

Rising iron ore prices and a better-than-expected PMI report from China boosted the Aussie higher early in the trading session. The comdoll gave up some og its gains, however, when the RBA shared its preference for a weaker currency.

AUD/USD hit a high of .8043 before settling down to .8027, AUD/JPY jumped to 88.70 before slipping to 88.44, EUR/AUD dipped to 1.4703 before rising to 1.4735, while AUD/NZD straight up rose by 34 pips (+0.32%) to 1.0684.

Watch Out For:

  • Switzerland’s markets out on Swiss National Day holiday
  • 7:15 am GMT: Spain’s manufacturing PMI (54.9 expected, 54.7 previous)
  • 7:45 am GMT: Italy’s manufacturing PMI expected to remain at 55.2
  • 7:50 am GMT: France’s final manufacturing PMI expected to remain at 55.4
  • 7:55 am GMT: Germany’s final manufacturing PMI expected to remain at 58.3
  • 7:55 am GMT: Germany’s unemployment change (-4K expected, -7K previous)
  • 8:00 am GMT: Euro Zone’s final manufacturing PMI expected to remain at 56.8
  • 8:30 am GMT: U.K. manufacturing PMI (54.4 expected, 54.3 previous)
  • 9:00 am GMT: Euro Zone’s preliminary flash GDP expected to remain at 0.6%