FOREX TRADING

RBA holds rate policy steady

The Reserve Bank of Australia (RBA) elected to keep rate policy steady at 4.5%. A steady RBA rate decision was widely expected. In its policy statement accompanying the rate decision the RBA said that policy was appropriate for the near-term. The RBA policy statement indicated that RBA officials were focused on the EU debt crisis. The RBA policy statement noted concern about sovereign credit worthiness in several European countries and that because of this concern equity prices and long-term bond yields have been declining and the AUD posted a sharp decline. The RBA noted the effort by European policymakers to address the EU debt crisis agreeing to a large aid package and renewed commitment to bring down the deficits. The RBA expects global growth to be close to trend in 2010 and said that the recovery is becoming more established in North America and growth in Asia remains quite strong. The RBA also stated that output growth in Australia will likely be above trend and that inflation could be near the upper half of the central bank’s target zone. The RBA gave no clues whether interest-rate policy will be changed anytime soon. In its policy statement the RBA noted that there is a little more uncertainty because of the debt crisis in Europe. The RBA appeared to signal that rates may remain on hold for some time to come. The AUD was trading lower ahead of the RBA policy announcement pressured by weaker equity markets and report of weak PMI data from China. AUD downside was partly limited by the fact that the RBA policy statement was seen as neutral. There had been speculation that the RBA policy statement would have been more dovish. The RBA was the first central bank to begin hiking rates back in November. The recent RBA rate hikes mean that the RBA is ahead of other major banks in its rate hike cycle. The EU debt crisis may encourage a longer pause in the RBA’s tightening cycle.

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Market Outlook:

Tactical view:

• EUR crosses stay offered; counting on stocks for GBP relief
• USD, JPY outperform in risk averse world

The USD continues to attract solid buying interest as confidence in the EUR and GBP wanes. With risk reversals still heavily skewed towards USD calls, the outlook for the dollar index remains uniformly bullish even as the probability of a Fed rate hike this year fades. Economic data has been playing second fiddle in recent weeks and until the picture for risk assets clears up and EU debt fears subside, we think macro data are unlikely to be critical for price action near-term. The high correlation with equities continues to weigh on GBP but with the BoE now also reasserting its influence, we see no immediate escape for GBP from the clutches of the sterling bears. April retail sales and CPI data, and the MPC minutes will keep GBP on a knife-edge next week.

Recap

The positive knee-jerk reaction to a Cons/LD government quickly petered out and saw the market re-establish short GBP positions vs the principal G10 currencies except vs the EUR. GBP/USD dropped below 1.45, and following a dovish BoE QIR, the cross is now slowly gravitating towards the 1.40-1.44 area. Buying of EU peripheral debt by the ECB briefly underpinned the EUR, but selling resumed as the Ascension Day holiday pushed peripheral spreads wider again over bunds. EUR/USD slipped below 1.2500 and now threatens 1.2330, the Oct-08 low. The JPY and USD were the best performers in the G10 as a probe into US sub-prime mortgages and lower commodity prices caused equities to resume their decline, spurring a flight-to-quality. The CAD held up remarkably well considering the fall in crude oil below $75 to a 3-month low, but looks well placed to draw support from the outlook for higher interest rates.

Economic data continues to be a sideshow to the jitters in equity and sovereign debt space. The BoE kept Bank rate unchanged at 0.50% and the APF at £200bln, but in its quarterly Inflation Report it warned of downside risks to growth as public spending cuts in the EU and the UK threaten to hit demand. The BoE also sees CPI below 2% target in two years time based on the implied futures curve for interest rates. Manufacturing production rose a much stronger than forecast 2.3% m/m in March, fuelling speculation of an upward revision to Q1 GDP later this month. Jobless claims fell in March by 27,100, and the ILO unemployment rate held steady at 8%.

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The Reserve Bank of Australia (RBA) will hold a policy meeting on Tuesday, May 4th. The RBA hiked rates 25bps in April and in the policy statement left the door open for future rate hikes. According to the April RBA policy statement the global economy is growing, Australian growth is close to trend, global financial markets are functioning better, inflation has risen and interest rates remain somewhat below average. The RBA has raised rates by 125bps since October with current overnight rate at 4.25%. There are a number of factors that point to a 25bps point rate hike by the RBA Tuesday. Recent Australian economic data confirms improving domestic growth and rising inflationary pressures. Australia’s GDP grew at its fastest pace in two years rising 0.9% in Q1 as consumer spending has been strong. The Q1 inflation rate rose by 0.9% compared to 0.5% in the fourth quarter. Australian employers have created more than 200k jobs over the last five months and the unemployment rate is at an 11 month low of 5.3%. Australia’s industrial activity surged in Q1 rising at its fastest pace in two years. Australian swap rates rose to an eight-month high Monday and implied forwards predict a 70% chance of an RBA rate hike Tuesday up from 55% Friday. The rise in swap rates increases the odds that the RBA will raise rates.

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The biggest outperformer on the session has been CAD after the BoC rate decision revealed a first hike may be far more imminent than markets have priced in. Although rates were indeed kept on hold at 0.25% as expected, there was a notable absence in the statement of the conditional pledge to keep rates at that level until at least July – suggesting a tightening cycle may begin before that time. USDCAD has plunged below parity to 0.9971 lows, a move that represents approximately a 2% gain for CAD against the USD today.

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The Bank of Canada (BOC) will hold a policy meeting on Tuesday, April 20th. At the March policy meeting the BOC left interest rates unchanged at a record low 0.25% and said that inflation and economic growth had been higher than expected. The BOC reaffirmed its commitment to maintaining yields at the record low level through June 2010 conditional on inflation. The March policy statement said that Canada’s domestic economic activity had been slightly higher than projected in its January report and the recovery in exports continues. The recovery is supported by policy stimulus, increased confidence, improved financial conditions, global growth and higher terms of trade. Strength of the CAD and low demand from the US act as drag on the Canadian recovery. Recent Canadian economic data confirms faster growth and higher inflation. Canada’s economy expanded at its fastest pace in three years in January and the trade surplus grew for the fifth straight month with exports rising by 2.8% in February. Canada created 17,900 new jobs in March and inflationary pressures are building. Canada’s annual core inflation rate accelerated to 2.1% in February. The BOC’s Business Outlook survey released on April 12th states that 40% of Canadian executives surveyed expect inflation to rise by 2 to 3% over the next two years. This is up from 20% of executives in January. BOC inflation target is 2%.

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Sunrise Market Commentary

• More details on Greek support package put bonds under pressure
  Friday, the bund came under pressure on expectations a more detailed Greek rescue package would be made public soon. Over the weekend, authorities did publish a huge €40-46B package that will go some way to ease investors’ concerns about the country. Return of risk appetite should weigh on the bunds.
• Euro rebounds on new Greek rescue plan
  On Friday, a short covering move helped EUR/USD to recoup a big part of the week losses as markets anticipated a new EU initiative to support Greece. A new plan was announced over the weekend. This triggered additional euro gains this morning. However, it is highly doubtful that the current development will mark a major U-turn for the EUR/USD cross rate in a longer term perspective. (more…)

Ahead of the BoE and ECB rate decision today, we see that the UK industrial and manufacturing productions beat estimates therefore supporting the fact that the expansion in the manufacturing sector is due to the higher production output.

Starting off with the industrial production in February, we saw that it rose to 1.0% from the revised prior reading of -0.5% from -0.4% which is better than the projected reading of 0.5%, while on the year it improved to -0.1% from the revised previous reading of -1.6% from -1.5%, while the markets were expecting a decline of 0.5 percent.

As the production from the manufacturing sector is recovering, this hints that production output is somewhat enhancing as industries are trying their hardest to shake off the worst global recession witnessed since post World War era. The higher production output indicates that demand levels are slightly inclining and this helping industries produce more.

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The minutes released this afternoon from the March 16 FOMC meeting provided some background discussion that lay behind the statement that was released at the conclusion of that meeting. The statement contained very little in terms of surprises although it seemed to hint at a slightly more upbeat assessment of the economic recovery. Today’s minutes reinforced this impression of commenting that “participants agreed that economic activity continued to strengthen and that the labour market appeared to be stabilizing.” This was qualified by the observation that incoming data confirmed that the “economic recovery was likely to proceed at a moderate pace;” however, the revised outlook for growth was not significant enough to alter Fed’s view that inflation is “likely to be subdued for some time.” In fact, today’s minutes revealed that FOMC members “saw recent inflation readings as suggesting a slightly greater deceleration in consumer prices than had been anticipated.”

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