RBA Stays Pat, AUD Falls

The week started on a positive note for the global equities which continue to surf on the optimism that the Federal Reserve’s (Fed) next move won’t be a rate hike, which I think is overdone and that next week’s US inflation data could be a rude awakening.

But one thing is sure, the earnings season is going well and analysts project that the S&P500 earnings will grow 17% this year. The S&P500 jumped 1% yesterday above the 50-DMA. FTSE futures are up 1% and will likely push the British blue-chip index to a fresh record at the open.

Stocks in Japan remain supported by the loose Bank of Japan (BoJ) policy and a soft yen, Chinese equities continue to recover and the CSI index is back above its 200-DMA since last week. The index is up by nearly 20% since the February dip on Chinese efforts to boost its economy and investors looking to diversify following record highs in major Western markets.

On the geopolitical front, things hardly move toward the right direction. This week, Xi Jinping is visiting Europe. Behind the forces smiles, Xi asks Macron to avoid a new cold war, while the EU doesn’t want China to dump prices of solar panels and electric cars, and Ukraine is a major headache. We all know that we are not going back to the old good days of happy globalization anytime soon, and the latter will continue to weigh on China appetite. Without the help of the rest of the world, China will hardly go back to its pre-2020 glorious days.

In the Middle East, tensions remain. US crude remains bid near the 100-DMA – and near oversold market conditions – as Israel refused a ceasefire deal and is preparing for a big offensive in Rafah. The $80-80.50pb range – where the 200-DMA meets the major 38.2% on ytd rise – is the key technical area to watch. Right now, oil is trading in the bearish consolidation zone, but the reflation trade, the geopolitical setup and OPEC risks point that we could see a dip near the $77/78pb zone and recovery. OPEC and its allies will likely extend supply cuts into the second half of the year to prevent from a global surplus to press prices. Iraq and Kazakhstan are working on curbing their production to get back into their quotas. But the US’s got the world’s back covered. The daily production there has almost reached 13 mio barrels per day – that’s more than Saudi Arabia which pumps around 9 mio barrels a day. Beyond the possibility of a short term spike, we will unlikely see the price of a barrel of crude go too, high too fast. And that’s good news for your global inflation battle.

Speaking of that, the Reserve Bank of Australia (RBA) left its policy rate unchanged today and warned that inflation is declining more slowly than expected, that persistence of services inflation is a key uncertainty, that it will be some time yet before inflation is sustainably in the target range and that they will remain vigilant to upside risks. Surprisingly, the kneejerk reaction to the decision has been a decline in the AUDUSD to the 66 cents level. Elsewhere, the USDJPY recovers timidly after last week’s presumed intervention from the Bank of Japan (BoJ), the EURUSD tests the 200-DMA resistance while Cable trades timidly above its own 200-DMA with the risk of seeing the recent gains melt rapidly if the Bank of England (BoE) gives a clearer sign of an approaching rate cut at this week’s meeting.