No FX Consensus on Rate Day But Aussie Shines

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Market Drivers for February 6, 2014
AU Retail Sales, Trade Balance all beat sending Aussie towards 9000
ECB/BoE on tap
Nikkei -0.18% Europe .92%
Oil $97/bbl
Gold $1258/oz.

Europe and Asia:
AU Retail Sales 0.5% vs. 0.5%
AU Trade Balance 0.47B vs. -0.27B
EUR Retail PMI 50.5 vs. 47.7

North America:
GBP BoE 7:00 AM
USD Weekly jobless 8:30 AM
USD Trade Balance 8:30 AM

It’s been a sleepy night of trade in the currency market with major happy to trace out narrow ranges ahead of the ECB and BOE meetings later in the day. The one standout today was the Aussie which rose almost to the key 9000 barrier on good Retail Sales and surprising Trade surplus data.

Australian Retail Sales printed as expected at 0.5% versus 0.5% eyed suggesting that consumer demand remains steady. Retail sales have now recorded six consecutive month over month increases indicating the RBA’s quick pivot to an easy monetary policy may have stabilized demand.

More surprisingly and perhaps even more importantly Australian Trade Balance registered a small surplus of 0.47B versus expectations of a deficit of -0.27B. The month’s prior data was also revised upward to a small surplus of 0.08B. Australia has now recorded two straight month of positive trade balances after running deficits for most of 2012 and 2013. The improvement in terms of trade was highly positive given the RBA keen focus on that factor and suggests that Australia is now able to compete effectively at current exchange rate levels.

The Aussie jumped higher in reaction to the news but the rally ran out of steam ahead of the key .9000 figure in morning Asian trade. Still the pair remains well bid and looks to extend its recovery through the.9000 level sometime in the near future as sentiment towards the unit has improved markedly. Not only has the RBA signaled that it is moving from and easing to a neutral bias, but not some analysts suggest that the central bank may begin to t may ighten by the end of this year. Such change of policy should keep the Aussie well supported and barring any sudden economic shocks, the pair looks to have made solid bottom at the 8650 level.

In Europe meantime, both the euro and pound tread water ahead of the central bank meetings today. Cable has been slightly weaker in the aftermath of yesterday’s softer than forecast PMI Services results. As we pointed out earlier in the week, although UK economy continues to enjoy some of the fastest growth in the G-7 universe, its rate of acceleration had declined and as such eased some of the pressure on the BoE to tighten monetary policy in the near term. Today the the Boe is not expected to make any changes, although the markets will look for more details and clarity at next week’s BoE inflation report.

As to the ECB, there is no consensus on what the central bank may do. No doubt the EZ region continues to see disinflationary pressures and consumer demand remains woefully weak. On the other hand PMI data shows a slight pick up in activity that may hint at a possible rebound in the periphery economies, as well as a modest improvement in France. Given such a landscape the ECB may prefer to wait on any new policy initiatives and simply reiterate its forward guidance. If however, the central bank does surprise with a rate cut, the euro is likely to plunge lower in a knee jerk reaction and could test the 1.3400 figure as the day proceeds.

Boris Schlossberg
Managing Director

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