Can AU Rates Remain on Hold for Long?

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Market Drivers Feb. 2, 2016

RBA stays on hold but Aussie weakens
UK PMI Construction hits 9 month lows
Nikkei -0.64% Eurostoxx -1.77%
Oil $31/bbl
Gold $1125/oz

Europe and Asia:
AUD RBA stays at 2.0%
GBP UK PMI Construction 55 vs. 57.6
EUR PPI -0.8% vs. -0.4%

North America:
No data

The Aussie jumped above the 7100 figure in mid morning Asian session dealing only to give up all of its gains as traders reacted to the latest RBA statement which left rates on hold at 2.0%.

The RBA in its release noted that the Australian economy continued to rebalance as growth from the services sector somewhat offset the contraction in mining. The general equilibrium has allowed the central bank to remain stationary as it held off on any further accommodation for now. Speaking for the board, RBA Governor Glenn Stevens noted that, “At today’s meeting, the Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The Board therefore decided that the current setting of monetary policy remained appropriate.”

The RBA however left the door open for further easing noting that,”Over the period ahead, new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand. Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand.”

It may be too early to celebrate Australia’s ability to rebalance itself as the worst of the economic news for the mining industry is yet to come. The drastic falloff in demand from China has slashed capital budgets going forward and the full extent of the layoffs in mining are still unknown. Up to now Australian employment picture has been remarkably robust given the adjustments in the region, but as RBA itself noted any future weakness in labor is likely to provide scope for further rate cuts and that along with the weakening commodity prices in the overnight trade was likely the contributing factor to Aussie’s reversal in overnight trade.

Elsewhere, UK Construction PMI hit a 9 month low as it missed its mark coming in at 55 vs. 57.6. Analysts blamed the general turbulence in the capital markets at the start of the year, but given the deceleration in trend the data suggests that growth in the sector may have peaked and is clearly slowing as we start the new year. Cable saw little reaction to the news and continued to hover near the 1.4400 level as short covering persisted for the second day in a row, but traders will focus much more intently on the PMI Services report tomorrow to determine if the pair has really put in a bottom for now.

In North America the calendar is barren and we may put in yet another sideways days as markets await the key employment reports due later this week. USD/JPY weakened a bit in overnight dealing but remains supported above the 120.00 level, but its true test will come on Friday. If the NFPs show an unexpected decline the pair could unwind much of the BOJ pop. For now however it appears to be content tp range between 120.00 and 121.00

Boris Schlossberg
Managing Director

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