Aussie Tumbles After RBA Cut 50bps, UK PMI And US ISM Next

Aussie tumbles sharply today after RBA unexpectedly cut rates by 50bps and issued a rather dovish statement. Also pressuring the aussie is house price index which showed -1.1% qoq fall in Q1 versus expectation of -0.5% qoq. China Manufacturing PMI rose less than expected to 53.3, is also weighing down sentiments a bit. Nonetheless, AUD/USD is hold above near term low of 1.0225 so far and markets are also generally staying in range elsewhere. Except that, yen maintains this week's gains, riding on the dissatisfaction on BoJ's pace and size of quantitative easing.

The RBA lowered the cash rate by -50bps to 3.75% in April as economic developments since the last meeting has weakened and inflation has moderated. The central acknowledged the growth later in the year would be "below-trend" but a deep downturn is not likely. The Australian dollar, which slipped ahead of the meeting, declined further after the rate decision. Also, RBA delivered a more dovish outlook on the domestic economy, citing the country's output growth as "below trend over the past year" due to both temporary factors as well as the "persistently high exchange rate."

Policymakers also acknowledged that the job market "softened." Concerning inflation, recent indicators have shown a decline in price level. Over the last 4 quarters, core CPI was just a little over 2% while headline CPI also fell to just over 1.5% recently. Yet, the RBA anticipated that inflation will stay in the 2-3% target over years. More in RBA Cut Cash Rate To 3.75%.

The official China manufacturing PMI rose from 53.1 to 53.3 in April, below expectation of 53.6. Though, the number stayed above 50 for the fifth month, indicating continuing expansion. Pressure on further policy stimulus is somewhat eased. But the overall outlook is still gloomy. Today's data was in sharp contrast to the HSBC manufacturing PMI, which stayed below 50 for the sixth consecutive months in April at 49.1. The different weighting of the two indices, with the HSBC manufacturing PMI more towards smaller businesses, suggests that much is still needed from the Chinese authorities through adjusted liquidity release to the markets.

Regarding recent rally in the Japanese yen, especially the acceleration since BoJ meeting last week, MOF's Nakao said that the authories will be "vigilant about the market, and whether there's speculative movement for the yen's appreciation to take advantage of this timing." Nakao said they'll "continue to closely monitor the market with caution so we can act in a timely and appropriate manner when needed." Prime Minister Noda said last week that BoJ must take "bold" actions with "utmost efforts" to achieve the 1% inflation target.

Looking ahead, UK PMI manufacturing will be the main focus in European session and is expected to drop to 51.5 in April. Sterling has somewhat survived last week's poor Q1 GDP data and remained resilient against other European majors so far. Investors are seeing UK as the relatively better safe haven as European debt crisis resurfaces with focus in Spain.

Also, there are still expectation that BoE would pause the quantitative easing after completing the current GBP 325b program. However, the pound would be very vulnerable to to downside surprises in upcoming economic data. The dollar will also face a number of tests this week starting with today's ISM manufacturing index, which is expected to drop to 53.0 in April.