RBA Minutes Show Market Worries Ahead Of ECB & BoJ

The morning market was upset by the worrisome Reserve Bank of Australia minutes which showed that the members were stressed over the UK referendum as well as global growth declines. Contraction in the Chinese economy kept RBA on edge. GDP growth in Australia’s major trading partners looked to have remained slightly below average over recent months, in line with earlier forecasts. GDP growth in China appeared to have eased further, which was continuing to affect economic conditions throughout the Asian region. Monetary policy remained very accommodative across the major economies and was expected to remain so given that inflation was below most central banks’ targets, despite improvements in labor markets leading to full employment in several large advanced economies.
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The Aussie took a big hit dipping 68 points to trade at 0.7523 after the minutes. Currently the pair is trading 0.7581. The worries extended across the Tasmanian sea and upset kiwi traders as the NZD/USD fell 82 points to 0. 7034 and currently trading at 0.7060.  The RBNZ, like its Australian counterpart, has been forced to temper its easing zeal because of an overheated housing market. Like in Australia, it has, with regulators, used macro-prudential measures to free its hand.

Even still, Monday’s data left the RBNZ “in a very tricky position. Inflation is weaker than it thought but housing is stronger”, said Dales.

The greenback is trading flat in the morning at 96.56 after little data on Monday. The greenback remains positive after better than expected retail sales last Friday.

Central banks in the Eurozone and Japan as keeping market attention. The ECB is scheduled to meet on Thursday and the Bank of Japan the following week. The Financial Times reported that the yen recorded its sharpest drop in the past three decades last week, as markets sniffed the possibility of helicopter money arriving in Japan. The meetings of “Helicopter Ben” Bernanke with Bank of Japan officials, and then with Prime Minister Shinzo Abe, were the latest trigger for this speculation, but in reality the Japanese authorities have been revving up the helicopters for some while, and they seem to be running out of alternatives.

The Abe government is on the verge of becoming the first government of a major developed economy to monetize its government debt on a permanent basis since 1945. In Japan, there are many institutional and political hurdles that stand in the way of helicopter drops. The direct financing of a government deficit by the Bank of Japan is illegal, under Article 5 of the Public Finance Act. But it seems that the government may be considering maneuvers to get round these roadblocks.

The Japanese problem is that inflation expectations have plummeted since the failure of Governor Haruhiko Kuroda’s attempt to ease monetary policy by introducing negative interest rates in January. The USD/JPY is trading at 106.20. The steady decline of the yen against the dollar and the euro may take some of the pressure of the Bank of Japan.

Many believe the ECB will hold fire this week but the press conference will give Mario Draghi time to address low inflation and the ECB bond buying program as it moved into its phase of buying bonds of public companies. The euro is trading flat this morning at 1.1076 near the bottom of its trading range.  The European Central Bank meets later this week against a backdrop of sharply lower government bond yields that raising pressure on the ECB to address a scarcity of bonds for its 1.7 trillion-euro stimulus program.

About 55 percent of the German bonds on the ECB’s shopping list are ineligible for its asset-purchase program because they yield less than the deposit rate, according to Swiss wealth manager Pictet. That is up from 38 percent on June 2, when the ECB’s Governing Council last met to discuss monetary policy.