rba remains on hold as investor sentiment sours 2049372015

The Reserve Bank of Australia (RBA) left the official cash rate at 2.00% as expected, but kept its options open. It noted that in current circumstances monetary policy needs to be accommodative, but refrained from hinting that more cuts may be on the way. Stevens’ said that the board will continue to monitor economic and financial conditions and determine whether the current stance of policy is appropriate.

Some market participants were expecting the bank to strike a more dovish tone, thus the aussie initially rallied on the back of today’s statement, before quickly gaving up these gains. The bank highlighted softening conditions in China and associated volatility in equity markets, but it remains firmly in wait-and-see mode and the overall impact on the Australian dollar of today’ statement should be fairly neutral. The RBA reiterated its now soft stance on the aussie after its recent fall, noting that it’s adjusting to the significant declines in key commodity prices.

Asia’s equity markets fall once more

Overall, it has been another choppy day in Asia as investors remain cautious about the outlook for China. Investor sentiment turned sour early in the session as China’s stock markets plunged into the red, with investors flocking to the safe haven status of the yen and fleeing major equity markets. In fact, all major stock markets in Asia are in negative territory at the time of writing, despite the release of broadly better than expected manufacturing numbers for August out of China; official Manufacturing PMI came in at 49.7, matching expectations, and Caixin’s private sector reading is 47.3, slightly better than anticipated.

While the aforementioned Chinese economic data broadly beat expectations, it also highlights a continued softening of the all-important manufacturing sector in the world’s second largest economy, despite widespread policy loosening and support from Beijing. This raises doubts about the overall health of China’s economy and the ability of policy makers to manage the slowdown, especially given its still volatile stock markets, which is infecting global investor sentiment.

AUDUSD jumps as USD falls

The aussie has been largely able to brush aside today’s risk-off tone in the market, partly because bears are busy mauling the US dollar. The market continues to push out expectations of monetary policy tightening in the US as it seems more and more unlikely the Fed will raise rates this month.

AUDUSD bounced off support around 0.7100 early in the session, before making an unsuccessful run at 0.7155. With positioning extremely short on this pair already, we’re keeping an eye on a potential unwinding of these positions if this little US dollar sell-off gathers momentum.

Source: City Index