RBA Does not Cut; Brexit Talks Go Nowhere

Market Drivers May 7, 2019

RBA does not Cut
Brexit negotiations continue
Nikkei -1.51% Dax -0.38%
Oil $61/bbl
Gold $1281/oz.

Europe and Asia:

RBA keeps rates on hold

North America:

CAD Ivey PMI 10:00

The Reserve Bank of Australia surprised the market today by keeping rates on hold although its statement stressed the many downside risks since its last communique last month.

"The outlook for the global economy remains reasonable, although the risks are tilted to the downside. Growth in international trade has declined and investment intentions have softened in a number of countries," the bank noted. However, the decline in growth and the weaker than expected inflation readings were not enough to persuade Governor Lowe and company that rates need to be lowered.

One key offset to the dovish economic climate is the surprisingly robust labor environment. The bank noted that "The strong employment growth over the past year or so has led to some pick-up in wages growth, which is a welcome development. Some further lift in wages growth is expected, although this is likely to be a gradual process."

Many analysts have pointed out that unless labor conditions weaken Governor is unlikely to cut rates regardless of weak price pressures. If that's the case than Aussie could be subject to a short squeeze over the next week or so especially in next week's employment data continues to demonstrate strong demand. Another upside surprise in jobs could push Aussie back through the .7100 figure much to the consternation of the shorts who may have been trapped by the break of the key .7000 barrier.

Meanwhile, in UK the cross-party talks on Brexit continued and cable was tossed back and forth on leaks that they were going well then badly. While the volatility on the pair will persist with every headline we remain skeptical that any significant progress will be made. It is not to Labour's political advantage to salvage the Brexit disaster for Tories and they will no doubt try to push for a no-confidence vote, but given that recent local elections saw a massive revolt against both parties, such strategy is fraught with risk. Meanwhile, the market is losing its enthusiasm for a Brexit compromise and cable is now back below 1.3100 heading into North American trade.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.