RBA Lowers the Boom on Aussie

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Market Drivers February 3, 2015

RBA cuts by 25bp say room for more
UK PMI construction better at 59 vs. 57
Nikkei -1.27% Europe 1.40%
Oil $50/bbl
Gold $1285/oz.

Europe and Asia:
RBA cuts cash rate 25bp
UK PMI Construction 59.1 vs. 56.9

North America:

USD IBD Eco Optimism 10:00

The Reserve Bank of Australia lowered its benchmark rate by 25 basis point to record low of 2.25% taking the Aussie lower by 200 points as it hinted that there may more rate cuts to come.

Citing below trend growth and the low rate of inflation the RBA stated that it has scope to cut rates further and added that a further fall in AUD is likely needed to balance the economy. The move was a surprise to the market where most analysts believed that the RBA would remain stationary for the time being, although reports by Australian business media last week indicated that a move was imminent.

In a world of crumbling commodity prices, the RBA clearly felt that it had no choice but to lower its rates especially given the fact that Bank of Canada did so just a few weeks ago. The G-10 central banks are now involved in a policy of competitive currency devaluation as they try to prop up their economies export sectors amidst a global deflationary environment.

The move by the RBA has taken the benchmark rates in Australia to a record low 2.25% but there is every indication that they may go lower and even break the 2.00% handle if growth remains anemic for the foreseeable future. Given the shift in RBA posture, the economic data from Oz will now become even more important to the market with next week’s AU employment numbers key to setting the tone for the near term.

The Aussie tumbled more than 200 points in the aftermath of the release before finally finding a measure of support at the 7625 level. Given the relentless desire of the RBA to see the unit trade lower, the pair could drift towards the psychologically key 7500 level over the next few days especially is US data show steady improvement highlighting the divergence in monetary policies.

Elsewhere, cable was bid well as PMI Construction data proved better than expected at 59 versus 56.9. This is the second PMI release this month that has beaten expectations, but the true measure of improvement will come tomorrow when the PMI Services report hits the tape. The market is looking for a bump to 56.6 from 55.8 the month prior and if the report meets consensus view cable may finally stage a rally off the 1.5000 level where it has remained for the past few days.

The North American event risk calendar is nearly barren today with only the economic optimism data at 1500 GMT. Generally the majors remain in a highly consolidative ranges and today is likely to continue that pattern with USD/JPY cycling between 117.00-118.00 while EUR/USD travels between 1.1300-1.1400

Boris Schlossberg
Managing Director

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