The RBA holds rates

• The RBA held the cash rate at 3.00% yesterday in a move widely expected by the market. The main course, however, was dished out in the accompanying statement with the board reiterating its easing bias. “The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand.” The board voiced a continued a lack of confidence towards global conditions stating, “Downside risks appear to have abated, for the moment at least”.  
• Given the board’s more dovish stance, any significant weakness in Australian data may prompt a rate cut. Unlike January, the month ahead is void of quarterly data such as GDP and Inflation, potentially delaying a monetary response until within the second quarter.
• First and foremost, January employment data will be released on Thursday. Labour market conditions are expected to continue softening with 5,800 new jobs expected and the unemployment rate ticking up to 5.5%. Last month saw 5,500 jobs lost with a marked decrease in full-time employment; the most important component of the data. A leading indicator, ANZ Job Ads, was down 0.9% in January.

• Australia’s Trade Balance, a measure of net exports in December 2012, was released yesterday with a deficit of 427 million. The figure slimmed significantly from November’s 2.79 billion deficit, the sharp upward spike shown on the right.
• Mining exports were a main contributor with metal ores and minerals up 7% and coal up 5%. With prices remaining off their highs, record export volumes drove the increase. Strong export figures were coupled with softer imports; goods and service imports were down 6%.

• Australian Retail Sales were released today disappointing the market at -0.2% growth in December from +0.3% expected. The data led the AUD weaker following the cash rate decision yesterday. The data will add to the cause for further rate cuts although interestingly the Australian Retail Association urged the RBA on Monday to hold interest rates rather than cut.

• Please see below for specific currency commentary.

USD

• AUDUSD was fairly range bound until price action resulting from the RBA interest rate decision. Resistance was found at 1.0450, the AUD dropping to 1.0349 at time of writing.

• The AUD dipped on Thursday night after another Chinese Manufacturing PMI was released last at 50.4, declining 0.2 from December. The survey on manufacturing business conditions conducted by the China Federation of Logistics and Purchasing was slightly less optimistic than the equivalent HSBC PMI measure of 52.3 released on the same day.

• U.S. Employment data was released last Friday with Non-Farm Employment Change, a measure of new job creation excluding agriculture. 157,000 new jobs were created in January and the unemployment rate climbed slightly to 7.9% from 7.8%. The data was neither strong nor weak, though the ISM Manufacturing PMI was a source of greater confidence. The figure, measuring manufacturing business conditions read 53.1 from 50.8 expected; indicating expansion when over 50.0. The survey reported accelerated growth meaning stronger jobs figures may be achieved in the coming months.
• The ISM Non-Manufacturing PMI was released today at 55.2 as expected by the market.

EUR

• The EUR extended gains this week, AUDEUR is now back at levels last seen over a year ago when the crisis first came to the fore.
• The recent turnaround in confidence is due to the tightening of sovereign debt yields, shown in the second graph, meaning sovereign debts are more sustainable and the risk of default is lower.
• The EUR strength is also a result of the ECB’s, German led, hawkish stance against monetary easing to weaken the currency; like that undertaken by the U.S. and Japan. French president Francois Hollande, became the latest politician to call for the ECB to follow other central banks and move to weaken the EUR.

• While a weaker EUR would help periphery countries regain competitiveness, currency wars generally don’t lead to any real growth in exports since everybody doing it is like nobody is doing it.
• The ECB will meet next Thursday where they may soften their view on monetary easing. As seen last year when the ECB pledged to do what it takes to keep sovereign bond yields down, a similar statement regarding the EUR strength may be all it takes to slow currency appreciation.

• The problems faced by Eurozone countries are by no means solved. Economic indicators continue to show contraction, albeit not as severely. Considering this, we don’t expect to see the EUR return to pre-crisis levels of the low 0.70’s, however without a substantial change in ECB policy, the peak-of-crisis blips above 0.8000 may be a thing of the past.

GBP

• The Bank of England will meet tomorrow to set the benchmark interest rate; it is expected to hold the rate at 0.5%.
• U.K PMI data, measuring business conditions, was mostly lacklustre with construction and manufacturing sectors worse than expected. The service sector surprised to the upside though reading 51.5.