As Comm Dollar GDPs Shrink will CBs Cut Rates?

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Market Drivers March 6, 2019
AU GDP misses
BOC on tap
Nikkei-0.60% Dax -0.35%
Oil $56/bbl
Gold $1287oz.

Europe and Asia:
AUD AU GDP 2.3% vs. 2.5%

North America:
USD ADP 08:15
CAD BOC Rate Meeting 10:00

The Australian GDP data missed its mark in overnight trade sending Aussie tumbling more than 0.5% in Asian session trade as the shorts pushed the pair within 30 pips of the psychologically key .7000 figure.

Australian GDP for Q4 printed at 0.2% versus 0.3% eyed with year on year number coming in at 2.3% versus 2.6% expected. There was a clear deceleration of economic activity in H2 of 2018 in Australia and analysts are now starting to price in the prospect of a rate cut by the RBA. Although the RBA remains decidedly neutral many Australian banks have started to call for a rate cut as early as July of this year, with some expecting at least 50 basis points of easing.

Tonight’s data showed a clear toll on the Australian economy of the slowdown in China. Australia remains particularly vulnerable because the country’s exports primarily serve the Chinese manufacturing sector which appears to be in a secular decline as it is hit hard by US-China trade war tensions and the slowdown of industrial and construction activity at home. Therefore, any further disappointments in US-China negotiations will almost certainly weigh on Aussie and could take the pair towards the .6800 figure over the near term horizon.

The sharp slowdown in GDP is of course also a Canadian story as well. Last Friday’s Canadian GDP miss triggered a massive selloff in loonie that has continued this week. USDCAD now sit perched right at the 1.3400 resistance level and all eyes in FX today will be on the BOC rate decision. No change in rate policy is expected but the market will look for any change in tone given the recent downbeat data. If the BOC suggests that rate may stay stationary for an extended period of time – and given the macro backdrop as well Fed’s neutral policy there is little reason to think otherwise – the loonie could see yet more selling as the day proceeds with USDCAD aiming to take out the key 1.3400 resistance in North American trade.

Elsewhere the market with also look carefully at the US ADP report due 13:15 GMT. Although yesterday’s ISM Non-Manufacturing report beat on the headline, the employment component which tends to be one of the better forecasters of labor demand, slipped by 2.6 percentage points. There have been some early signals that employment growth may have peaked in US with weekly jobless claims inching up over the past month. ADP is projected to print at 189K but if the number comes in at sub-150K rate USDJPY could quickly move below the 111.50 level on fears that US growth has peaked.

Boris Schlossberg
Managing Director

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