That was bold.

Well, that was a bit of a surprise to us all. The RBA announced the biggest single interest rate rise in Australia for more than 22 years overnight, as they attempt to halt the surge in inflation. The 50bps hike exceeded pretty much all estimates, with most analysts forecasting a 25bps hike. Even though inflation has been accelerating in Australia at just over 5% (YoY), that level is nowhere near as aggressive as much of the rest of the developed world. However, the RBA clearly deemed it necessary to make that bold hike now. Perhaps they had one eye on a potential global slowdown that could have a big impact their key exports. In their post-meeting statement, the RBA said that ongoing data will determine the frequency and level of hikes going forward.

The Aussie rallies, for a while

The announcement sparked a sharp, but ultimately short, rise in the Aussie. AUD/USD initially rallied to just under 0.7250, but gave-up most of its gains, as a broader risk-off environment then ensued across markets overnight, with the pair slipping back under 0.7180 in the process. Indeed, much of that broader decline may have been down to the RBA.

It is all about the 1922, in 2022

With a nationwide approval rating for Boris Johnson that has remained stubbornly under 30%* since before Christmas, a slew of backbench Tory MPs thought it pertinent to send a letter of disapproval to Sir Graham Brady, chair of the famed 1922 committee, to activate a vote of no confidence in his leadership yesterday evening. The vote was triggered after (at least) 54 conservative MPs, or 15% of the parliamentary party, expressed their written dissatisfaction in the prime minister. Boris spent the day canvassing Tory MPs and said that he saw the vote as a chance to ‘end media speculation and take this country forward’.

Boris wins, but it really was a close call

In the end, Johnson managed to (just about) scrape through, with 211 votes in favour versus 148 against, giving a 63 majority. Whilst he may have won on the evening, the sheer closeness of the vote will make it difficult for the PM to gain enough votes from within his party to make those necessary steps that he will need to take the country forward (in his own words). Indeed, the 41% of Tory MPs who voted against the PM is a far bigger number than those dissenting MPs who had voted against Theresa May, when she faced a similar vote 4 years ago. Theresa May was ultimately forced to resign as prime minister less than a year later.

*Source: YouGov

Why did the pound rally into the vote?

Given the negative stories that have beset the UK government over the past few years, a new prime minister would have had an opportunity to work from a clean slate, so to speak. GBP/USD moved from around 1.2480 to a high of 1.2566 ahead of the vote, but has since consolidated back to 1.2450. GBP/EUR moved back over 1.1700, but has also since slipped back to 1.1660. In fairness, the pound had traded a similar range against the major currencies over the past few days, highlighting that whilst the vote presented an entertaining short-term diversion from the norm for markets, any outcome is unlikely to have had a long-term impact on the direction of the pound.

A higher dollar, mostly

Given the relative dearth of economic data and major market-moving events yesterday, markets struggled for clear direction for the most part. However, with bond yields gradually rising, evidenced by the U.S 10-year yield moving as high as 3.04%, that was enough to spark a noteworthy dollar rally amongst currencies. The dollar index (DXY) rose back above 102.00, having finished last week on a soft footing and has since moved back over 102.50, as a risk-off environment envelopes markets.

 USD/JPY has now moved as high as 133.00, a level not seen since 2002. The pair has now accelerated from 126.90 to 133.00 since the end of May. Quite some rally. USD/CAD bucked the trend for a while, slipping to a 1-month low of 1.2535, before moving back over 1.2600 overnight.

What else is happening today?

UK – S&P Global/CIPS Services PMI (May)

US – Goods and Services Trade balance/Goods Trade Balance, Consumer Credit

CAD – Exports/Imports, Ivey Purchasing Managers Index

JAP – GDP (QoQ/Q1). Exp 0.3%, Prev 0.3%. Eco Watchers Survey (all Japanese data released overnight)