Russia Central Bank to ease, risk of AUD downside

Forex News and Events

Russia: Rates Decision

“Today the Bank of Russia is releasing its key rate which is currently at 11.50%. Earlier this week, the central bank has announced that it stopped purchasing U.S. dollars for the account of its foreign exchanges reserves as the ruble hit at a five-month low on Tuesday. In addition a weak ruble puts upward inflation pressure and the Russian economy is struggling with lingering oil prices. This is likely to prevent the central bank to cut too largely its key rate.

Furthermore, the main issue for Russia is to find the good balance between cutting rates and maintaining inflation under control. We then anticipate the Bank of Russia to cut its rate today by a 50 basis points. The central bank does not have a lot of flexibility and is therefore forced to adjust its monetary policy very smoothly or it may create disruptive effect that would lead to an inflation boom which is already at a 15.3%y/y.

USDRUB has broken this week the psychological level of 60 RUB for 1 dollar, the first time since March. We remain bearish on the RUB. Growth rate for the first quarter was -2.2%y/y and the outlook seems very negative due to the impact of Western sanctions. We target the 61.8% Fibonacci retracement at 62.76.” Yann Quelenn - Market Analyst

Effect of commodity weakness

The sudden collapse of the China equity market has highlighted the risks of such a massive economic engine—when China sneezes, the whole region of Asia catches a cold. While the initial catalysts for selling stocks were structural in nature, the focus quickly became the weakness of China's growth. Worries over the Chinese economy resumed due to the surprising drop in the July “flash” PMI to a 15-month low and corresponding soft price sub-indices. Incoming data suggests that without significant policy intervention, China will be unable to reach the official 7.0% 2015 GDP target. The spillover effect is that with a humming speculative market and/or stable growth expectations, we should also see the real-estate sector continue to contract. So here comes the cold. China's massive housing construction is extremely commodity demanding. The two largest inputs copper and iron ore are also Australia's largest commodity exports. The fall in global commodity prices has all but ended CAPEX investment in Australia, making any outlook of an economic upturn unlikely. Due to strong housing prices so far, the RBA has held off signaling additional rate cuts despite economic headwinds. Annualized growth in national house prices accelerated again in June and the RBA has stated that monetary policy must take into account overall financial stability. As commodities have slumped, the RBNZ and BoC have eased their monetary policy with a direct aim of weakening their currency to revive export growth. The RBA has a bit more room since the economic erosion has not been as unforgiving. Markets are now pricing in less than a 50% chance of a rate cut over the next three meetings, however, additional China below trend growth could easily push Australia’s economic outlook into the RBAs rate cut red zone. We are bearish AUDUSD and target a challenge to 0.7190 uptrend channel support before a deeper extension of downtrend.