If we did not have the Aussies, the RBA, or Governor Glenn Stevens, this would have been another bland and boring market to be talking about. Policy makers down under certainly know how to surprise it seems, as very few analysts had predicted any movement by the Central Bank in their latest rate decision. The governor has managed to keep markets on their toes by cutting overnight interest rates to a record low of +2.75% earlier this morning.
The "street" in general was expecting no change while the futures market saw less than a 50% chance of -25bps cut. Rhetoric and copy from the RBA was not too different from any other Central Bank communiqué of late. The RBA’s accompanying statement indicated that there was very little in global and domestic developments to concern policy makers – however, benign inflation, and what seems to be a global common theme within the bank’s +2-3% bandwidth, allowed Aussie policy makers to make the easy decision and take advantage of the situation.
On global growth, Governor Stevens and company saw growth picking up next year with the U.S. continuing on down the moderate expansion path, while China’s growth – Australia’s largest trading partner – would be “running at a more sustainable, but robust pace.” Not surprisingly, Aussie policy makers reiterate the weakness of the eurozone, which seems to be every Central Banker's easy target and soft touch. The commodity sensitive country cannot hide from its own policy makers who repeated the call that commodity prices remain high by historical standards and we should probably be expecting further moderation in prices.
Domestically, the RBA said that slower growth momentum at the tail end of last-year seems to have carried over into the first-half of 2013, and this despite the continent growing at an annual +3.1% clip in Q4. Policy makers acknowledged continued growth in employment but at a more moderate pace than the labor force, resulting in a slightly higher employment rate. Overall, Aussie policy makers are confident that the interest rate sensitive sectors should continue to benefit from the -200bp worth of cuts in the current easing cycle. The current easing should help the domestic economy from faltering significantly – staying ahead of the curve allows policy makers to remain close to "trend growth rates" as mining investments tapers off.
Following the RBA’s decision to cut its policy rate, the focus will now shift to the quarterly Statement of Monetary Policy out this Friday – the overall tone is expected to be dovish, very much in line with the o/n rate cut. The market should not be surprised to see a potential downgrade to the forecast, especially within the inflation outlook. Aussie policy maker’s robust employment views have somewhat tapered and on Thursday market consensus is seeking a +10k gain in the jobs headline accompanied with a “stable unemployment rate.” However, the market should not be surprised to be served a weaker report on the back of softer data and key indicators or late. The technicians continue to argue that the “outsized February gains were only partially reversed in March.” Weaker data both domestically and in China, coupled with the negative dynamic for the Aussie mining sector remains a strong bearish argument for the AUD.
Domestic data this morning revealed that Australia’s construction sector shrank for the 35th consecutive time last month (35.2 in April from 39), with a continued decline in home and apartment building. However, a nice touch was to see that the country’s trade balance was back in surplus (+AUD$307m in March) compared with a deficit (-AUD$111m) in February. On a more positive note, Aussie export data happened to provide the relief for the trade balance. Anyone fretting about China’s contribution to world growth only has to take a gander at Aussie raw material export numbers. The country’s exports to China jumped to a new record high in March – mostly in iron ore, up by +36%, m/m.
For the AUD, 1.0178 is the one month low plumbed after the -25bp cut this morning. Option barriers are mooted at 1.0150, with some bids naturally parked ahead of strike. This market remains small core long, caught in the surprise cut. There are stops reported sub-1.0150 and at 1.0100 of note – last year's low nearly 12-months ago. This year’s low remains at 1.0116 a print achieved in early March. On the topside, 1.0221 (April low) and 1.0240 (May low) now become strong resistance. The market has become a small better seller on rallies for the time being.
With one Central Bank decision out of the way the market now is waiting on the “Old Lady” or the BoE. They are no surprises expected from U.K. policy makers at their monetary policy meeting this Thursday – especially with their “new” boss in transit. The market does not expect any fireworks from this quarter, for that, everyone is tipping the IMF to provide most of the banter on their arrival to meet the U.K. Treasury, BoE and the Office for Budget Responsibility later in the week. Last month saw the IMF’s Chief economist unprovoked attack on the U.K. chancellor's latest plans. This year’s assessment of the U.K. is expected to be fiery affair!
The market concentrates on demand. With so little in the way of data for the U.S. this week, the fixed income market will continue to focus on the heavy issuance as the U.S. Treasury auctions +$32-billion 3s, +$24-billion 10s, and +$16-billion long-bonds this week. Net of the week’s Fed purchases, which will remove approximately -$14.1-billion of 10-year equivalent from the market, the refunding auctions will increase market supply by approximately +$56- billion in 10′s.
Finally, the 17-member single currency has awakened from its slumber by German manufacturing orders surging in March due to a pickup in eurozone demand. The single currency is breathing new life heading into the North American session after German manufacturing orders rose +2.2% in March (foreign +2.7%, Euro-zone +4.2%) – strongly bettering analysts' expectations for a -0.5% decline. The data suggests that German industry may be gradually emerging from its “soft patch.” With the EUR’s weekly lows and support remaining intact, the market’s true scope for gains appears above last Friday’s 1.3160 highs – momentum through here open up the market to retest last week’s highs around 1.3243. The technicians indicate that the 10 and 30 DMA remain positively aligned, adding to the overall upside potential. Perhaps Yen cross play selling will begin to have its own impact on the single currency.