The Australian Dollar jumped higher to test above 0.64 as the Reserve Bank of Australia surprised the market by keeping interest rates unchanged at 3.25%. The US Dollar traded lower as stock markets pared losses in overnight trading, weighing on safe-haven assets. Swiss Gross Domestic Product data is on tap ahead, with expectations calling for the first contraction in 5 years in the fourth quarter.
Key Overnight Developments
• Reserve Bank of Australia Surprises, Leaves Rates at 3.25%
• Australian Current Account Deficit Unexpectedly Narrows in Q4
• Retail Sales Slow to 0.2% in January, Likely to Decline Further
Critical Levels
The Euro rose as much as 0.6% against the US Dollar to retake the 1.26 level. The British Pound followed suit, rising as much as 0.9% to test above 1.41. The greenback inched lower as Asian stock exchanges pared initial losses, weighing on safe-haven assets. For complete analysis of all the major currency pairs, please see the latest weekly technical outlook report.
Asia Session Highlights
Australia’s Current Account Balance showed a narrower deficit than economists expected in the fourth quarter, printing at –A$6.5 billion versus forecasts of a –A$7.4 billion shortfall. Australia’s external balance improved by an impressive 67% from a year ago as the quarterly rise in exports (8%) doubled that of imports (4%). Although the headline figure certainly looks promising, it is important to note that much of the rise in the export reading is likely attributed to record-high commodity prices through the first half of 2008. Companies buying Australian coal and iron ore can typically seek to zero out currency risk by locking in contract terms at prevailing market prices. As these contracts expire, they will be renegotiated at significantly lower rates: coal prices have fallen a whopping 82% and iron ore has declined 57% as commodities began to tumble in mid-July. To that effect, income from overseas sales is likely to plunge as lower rates are taken into account, dwarfing export readings and eroding the surplus.
A separate report showed that Retail Sales added 0.2% in January, a sharp slowdown from December’s 3.8% result. Still, the reading performed better than economists expected as forecasts called for a -0.5% contraction. Consumer spending has seen some support from A$8.9 billion in government handouts that were distributed as part of fiscal stimulus plan. Looking ahead, further deterioration is likely as falling consumer confidence and a rising unemployment rate trim demand.
The Reserve Bank of Australia surprised the market by keeping interest rates unchanged at 3.25%. Expectations had called for a 25 basis point cut to bring rates to 3.00%. RBA Governor Glenn Stevens said that the Australian economy has not contracted “as much as in other countries” but acknowledged that current conditions are “clearly weak”. Stevens continued saying that although poor economic performance is likely to continue in the near term, the cumulative effects of monetary and fiscal measures already in place will “provide significant support to domestic demand over the period ahead”. With this in mind, the RBA has decided to opt for a neutral position this time around. Importantly, Stevens made sure to dispel any expectations that the bank has broadly settled on a neutral bias, saying “The Board will consider the position again at its next meeting.” The Australian Dollar jumped 48 pips higher immediately as the data crossed the wires and would test as high as 0.6416 before backing off to consolidate near the 0.64 level.
Euro Session: What to Expect
Switzerland’s Gross Domestic Product is expected to have contracted -0.8% through the fourth quarter, the first three months of negative growth in 5 years, suggesting the economy is shrinking at an annual pace of -0.1%. The global downturn has spread to the mountain nation as overseas demand shriveled in key export markets (most notably the Euro Zone), pushing companies to cut back output and boosting unemployment to a 2-year high of 3.3%. Stagnant growth has pushed inflation to just 0.1%, threatening deflation. Last week, the KOF Leading Indicator dropped to a record low, reinforcing a downward trajectory for the economy in the coming six to nine months. A survey of economists conducted by Bloomberg calls for the economy to shrink -1.0% through 2009.
To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.
