Central banks have kept markets guessing through 2015 and that trend continued overnight courtesy of the Reserve Bank of Australia. While the RBA decided to keep rates at a record low of 2.25% it explicitly told markets that “further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target.”
As I said yesterday, this decision comes a day after the lowest consumer price inflation reading since 2009 and with unemployment close to a 12½ year high nationally. The easing bias is as much about these economic fundamentals as it is about the strength of the Australian currency, which leapt higher on the decision to hold policy this month.
Governor Stevens repeated the Bank’s well-trotted out line that AUD remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices… a lower exchange rate is likely to be needed to achieve balanced growth in the economy.”
The US dollar is on the back foot as we open up this morning in Europe following yesterday’s ISM reading from the manufacturing sector that left most thinking that the sector had lost momentum in the past few months. A report showed that while bets on the US dollar increasing in value are still the most popular in the market, the number of bets has fallen in recent weeks. This has led some to think that the USD has had its chips for now.
Sterling was able to maintain its recent strength thanks to a resilient reading from the UK’s manufacturing sector. While the headline number rose to the highest level since July of last year, the component parts are telling a rather mixed story for the UK manufacturing sector. Job creation of around 5000 people a month is the obvious high point in this release, and comes hot on the heels of continuing strong output numbers and confidence that strength will remain through the remainder of the year.
The ongoing increase in demand remains focused on the consumer-side of the industry – unsurprising given the pick-up in disposable income afforded by oil price declines. This, however, is masking a rather large shortfall in longer-term investment spending which may rear its head later in the future.
Inflation pressures remain absent as those oil price falls continue to work through producer supply chains and into consumer baskets. While the growth picture is overall very solid, the price outlook will continue the Bank of England’s desire to hold off on interest rate increases this year.
Euro, too, managed a little strength yesterday following better than expected inflation and unemployment readings. While these near-term readings are preventing a slip in the single currency for now, the longer term trend is still lower. Thursday’s European Central Bank meeting is the obvious next checkpoint for the single currency but risks from Greece and its banking sector will remain in the background.
Today’s session is the quietest of the week with services PMIs tomorrow, Bank of England and European Central Bank meetings on Thursday and the US jobs report on Friday.
