Daily Morning Report 05.07.2016

The Australian dollar slipped on Tuesday as the central bank held steady and analysts speculated that easing could lie ahead, while the perceived safe-haven yen got a lift from worrying signs in China’s service sector.

Trading was subdued with no directional clues from U.S. markets, which were shut on Monday for the Independence Day holiday.

A private survey showed that activity in China’s services sector rose to an 11-month high in June, but a composite measure of activity fell to a four-month low. That raised fears the services sector may not be able to make up for a prolonged decline in the industrial economy that has pushed China’s growth to 25-year lows.

The dollar was down 0.5 percent at 102.03 yen after briefly dipping as low as 101.985, while the euro fell 0.8 percent to 113.51 yen (EURJPY).

The Aussie initially pulled away from session lows when the Reserve Bank of Australia kept policy steady, but then it slipped 0.3 percent to $0.7507 , moving away from Monday’s more than one-week high of $0.7545.

Australia’s central bank kept its cash rate steady at 1.75 percent, a widely expected decision given political uncertainty at home and abroad and a lack of up to date information on domestic inflation.

“The next natural signpost is the inflation data at the end of this month, so markets are anchored around a rate cut in August, and we think that won’t be the last one either,” said Ben Jarman, economist at JP Morgan.

Possible policy paralysis after no clear winner emerged from a weekend election continued to threaten the Aussie’s outlook, in addition to the potential Brexit fallout.

“Brexit is not a direct threat to Australia, but over time the hit to investment and risk-taking sentiment may weigh on commodity prices, adding to the pressure on the RBA,” Marshall Gittler, head of investment research at FXPrimus, said in a note.

Brexit has ramped up the urgency for some Asian central banks to ease monetary policy, as a prolonged period of uncertainty threatens a wider downshift in trade and investment.

The timing of Britain’s actual exit from the EU remains unclear, and against this backdrop, investors have begun to hope for additional stimulus and UK corporate tax cuts to blunt the impact of the move.

Sterling shed 0.3 percent to $1.3247 , but remained above last week’s 31-year trough of $1.3122 plumbed in the wake of the Brexit vote.