Dollar Slumps, RBA Decision Looms

A soft reading on US manufacturing raised fresh questions about the US economy. The US dollar was the laggard on the day following the ISM manufacturing data while the yen was the best performer. The RBA decision is the highlight of Asia-Pacific trading.  Friday's Premium long trade in EURUSD targeting 1.0870 awaits full execution (some platforms did show 1.0770), while cable awaits both short legs in progress.  See Premium Insights for the complete set-up. A new edition will be added on Tuesday evening.

The March ISM manufacturing fell to 51.3 compared to 54.2 expected. The new order component dropped to 51.4 from 57.8 while employment improved to 54.2 from 52.6.

The US dollar immediately dropped following the figures. The most compelling chart is USD/JPY, which is testing the 61.8% retracement of the mid-Feb to mid-March rally (93.13) and the 55-day moving average (93.03). If those levels break, look for the pair to decline further ahead of Thursday's BOJ decision.

The RBA sets interest rates for Australia at 0330 GMT. No economists surveyed by Bloomberg see the central bank shifting from its 3.00% but the market is pricing in a slight, 8% chance of a cut. The bias also remains to the downside with 25 basis points of cuts priced in over the next 12 months.

The main risk is that the RBA abandons its dovish bias and shifts firmly into neutral. The current statement says “an accommodative stance of monetary policy is appropriate” and that rates could be lowered “should that be necessary to support demand.”

If the RBA removes references to lower rates, AUD/USD is primed for a run to 1.0500 and perhaps beyond. In general, the RBA takes a more measured approach and it will be sensitive to moves that inflate AUD so look for a more subtle, gradual shift.