Case for RBA cut gains momentum on budget review

The Aussie dollar remained under moderate pressure overnight following the Mid-Year Economic Fiscal Outlook which unveiled a series of budget cuts in an effort to return the budget to surplus. Lower tax receipts and global headwinds have hit the government’s bottom line, requiring further cost cutting in attempt to squeeze out a surplus this year. It’s apparent any fiscal restraint will flow-on to monetary policy, providing even greater scope for the RBA to maintain an accommodative policy stance. This took away some of the Aussie dollars lustre yesterday, but we’ve still seen moderate support above the 103 US cent levels overnight alongside a late bounce from US equities.

Although risk trends will remain a primary directive for the local unit, the domestic week ahead will see inflation and Chinese manufacturing data a primary influence. The RBA’s preferred measure of inflation – the trimmed mean and median – which excludes the most volatile prices on the scale, are both expected to record 0.6 percent growth on quarter, or 2.2 percent annually. Headline inflation is expected to record growth of 1-percent from 0.5 percent in the second-quarter, representing annual growth of 1.6 percent. The RBA has made clear the local inflation outlook provides “scope” for further monetary accommodation and markets have suitably priced in the chances of a November rate cut.

In a recent interview with the Wall Street Journal, RBA board member Jillian Broadbent flagged the need for a weaker currency as the mining boom comes off the boil, noting “I would hope the Australian dollar gets a bit weaker going forward as the mining boom eases off,” And then we might get a bit more of a boost from having the currency a bit lower, rather than the dampening effect of being higher.” At the very least, this suggests the high currency remains at the forefront of the RBA’s mind, however, although it may add weight to a near-term rate cut, it hardly suggests the bank will embark on a series of cuts specifically targeting the high exchange rate.

Meanwhile, the Euro avoid another meltdown overnight after Spain‘s Peoples Party – led by Mariano Rajoy – secured a win in the region of Galicia. Markets are clearly focusing on the prospect of a Spanish bailout, and any easing in political tension provides further scope for Rajoy’s ruling party. Still, hopes of a Spanish bailout may wear as Rajoy maintains a casual demeanor in spite of growing investor expectations. “I’m not going to take into account any pressure that people might exert on me, but frankly no one is doing that,” I don’t see any European Union leader telling me I should use the mechanism the ECB has put in place.” Rajoy noted last week. Nevertheless, there’s been little in the way of catalysts to prompt a recalibration of expectations, thus providing an element of support for the Euro which remained supported above $US1.30 overnight.