How much of downside does AUD have against the USD in a fully-anticipated rate cut scenario? That is the big question for currency traders today, and the answer will be released at 12:30pm Singapore time as the Reserve Bank of Australia (RBA) will announce its interest rate decision.

The futures market suggests that market participants are expecting a 97.9% probability of a 25bps cut and a 2.1% chance of a 50bps cut.

Those who bet the Aussie to tumble might be disappointed as markets nowadays act on expectation and unwind on fact. More importantly, the US dollar index has likely reached its peak and entered into correction as trade concerns weigh on America’s economic growth. Tepid growth outlook has led markets to believe the Fed will soon cut interest rates, up to twice by the end of this year. The US treasury curve has shifted lower in the past month, and the 10-year treasury yield diving over 50bps to only 2.09%. This has led to the yield curve becoming even more inverted, spurring fears of an economic recession.

A weaker dollar will cushion the downside for the AUD/USD despite any RBA rate cuts. If the RBA cuts its rate as expected, the AUD may still see a knee-jerk decline. However, it is unlikely to stay down for long given the fact of a broad dollar retracement. If the RBA holds its rate unchanged, an unwinding of short Aussie positions will lead to a spike up in AUD as the market will be disappointed.

Technically, AUD/USD has formed a ‘higher high’ in its 4-hour chart. Fibonacci Extension suggests its immediate resistance level at 0.697 (100% Fibonacci), followed by 0.700 (127.2% Fibonacci). Immediate support level can be found at 0.695(78.6%) and 0.694 (61.8%).

For the equities market, the sky remains cloudy as US technology giants – Google, Apple, Facebook and Amazon – are facing multiple antitrust investigations. This led to a 1.6% decline in the NASDAQ index although the Dow Jones Index managed to close marginally higher. Gold prices surged for a second day to US$ 1,326 – a five month high, while crude oil slumped further to US$ 62.4.

Manufacturing activity in Singapore continued its downward trajectory as global demand cooled and trade frictions heightened. Singapore’s PMI reading ended a 32-consecutive month of expansion in May and entered into contraction. The figure is in line with a broad slowdown in manufacturing activities across the globe as cyclical slowdown deepens on the rise of detrimental trade tariffs.

With trade tariffs between the US and China kicking in end-May and early June, new orders and exports are likely to remain weak in the months to come. Higher imports and input prices are likely to inhibit profit margin and higher prices will eventually be transferred to end users.


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