Softer China PMIs likely to lead to lower Q2 GDP and a weaker RMB

Following the release of jobs data for May in mid-June, which saw the unemployment rate fall to pre-pandemic levels at 5.1%, a third local bank brought forward its RBA lift-off expectations date to November 2022.

Today after a fourth Australian capital city Brisbane joined three others in lockdown to thwart the spread of the Delta variant, there are now over 12 million Australians locked down unable to leave their homes, except for essential reasons including shopping and exercise.

The result of the outbreak has been a dramatic loss of reputation for the Australian Federal government following its tardy vaccine rollout and also for the NSW government given its delayed decision to lockdown the suburbs at the center of the Sydney outbreak.

The risks of wider and extended lockdowns are likely to warrant consideration at next Tuesday's RBA meeting. More so given the July meeting has been set up as a key one for a decision on the future direction of monetary policy.

As such, the RBA is likely to emphasise that considerable uncertainty remains and that substantial support is still required, mindful that important financial support programs such as Jobkeeper expired in late March.

It may also take the opportunity to push back against the more aggressive pricing of interest rate hikes that have followed the big bank's calls. As of yesterday, the OIS curve had 38bp of hikes priced for year-end 2022 and 71bp for year-end 2023.

While this would be a welcome development for the local equity market, it would be an unwelcome turn of events for the AUDUSD, which remains out of favour following the more hawkish FOMC meeting.

Technically the AUDUSD remains at risk of a deeper decline and to negate downside risks it needs to see a sustained recovery back above the 200-day ma at .7660 followed by a break and daily close above last week’s .7616 high. Aware that until this occurs, allow for a decline towards .7200c.

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