Market Overview by FiboGroup - 2015

The Australian dollar is trading in a tight range today holding up pretty well after last week’s shock decision by the Swiss Central Bank to lift the ceiling on the Swiss Franc against the Euro, which sent currency markets reeling, and saw the Aussie tumble against the US dollar.

At 1.55pm (AEDT) the local currency was trading at US81.22 cents slightly down from US81.32 cents at close of trade on Friday.

Also helping the Australian dollars cause today was the release of new motor vehicle sales in Australia which rose a seasonally adjusted 3.0% to 93,903 in December according to the Australian Bureau of Statistics although the overall picture shows total sales are now a seasonally adjusted 1% lower than a year earlier.

The ride for the Aussie dollar above US82.00 cents is not expected to last for long according to BlackRock head of fixed income Stephen Miller who says the overall picture of the Australian economy isn’t good and we may see the dollar significantly lower in the next few months,

"The Australian dollar is a sell. The economy is weaker, terms of trade are down, we have sub-trend growth and potentially the lowest nominal growth in 50 years”

"There are lots of headwinds and that will be reflected in our currency. I won't be surprised if we see below US70 cents in the first half of 2015."

BlackRock, the world’s largest asset manager has been calling for the Australian dollar to fall further for quiet sometime.

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The Australian dollar is trading lower today after the latest GDP figures from China confirmed most analyst’s fears that is the Chinese economy is heading for hard times.

At 7.30pm (AEDT) the Australian dollar is trading at US81.96 cents down from US82.09 cents in yesterday’s trade.

GDP in the world's second-largest economy rose by 7.4% last year according to China's National Bureau of Statistics coming in under the government’s target of 7.5% although slightly above analysts’ expectations of 7.3%.

The quarterly December GDP numbers were the worst performer coming in at 1.5% against a consensus of 1.7% and well down on last quarters figure of 1.9%

This was China’s slowest growth in 25 years which doesn’t sit well for Australia as any recovery in the Australian economy will be closely connected to China, and in particular the demand for Iron ore and other commodities from the land down under.

The Aussie dollar initially welcomed the news but then pulled back after traders digested the figures according to Commonwealth Bank currency strategist Joseph Capurso who noted,

"At first, markets bid up the Aussie because some of the data were a bit better than expected but then the Aussie gave up all of those gains,"

"The quarterly GDP number shows the Chinese economy is still continuing to slow”.

"The only reason the annual number was better was because of upward revisions to previous quarters - that's why the Aussie fell away about an hour after the data came out."

Adding fuel to the fire, the Chinese government have predicted a further slowdown in the economy this year, especially the real estate market that they believe will continue its downward trend after falling 4.5% in 2014.

Looking ahead at the difficulties China faces Premier Li Keqiang on Monday mentioned,

"As the global economy is undergoing a deep restructuring and slow recovery, China's government will likely face heavy tasks in tackling the difficulties,"

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The Australian dollar is under pressure today after a report from the International monetary fund showed that they expect a slowdown in global growth this year adding to the woes of the commodity based currency.

The IMF noted the expected weakness in the Eurozone, China, and Japan will be a drag on the world economy and limit growth to 3.5% down from their previous forecast of 3.8%.

Westpac senior market strategist Imre Speizer said the currency received a double hit in the last couple of days starting with poor data out of China yesterday.

“Sentiment soured slightly amid a global growth downgrade from the IMF and lower oil prices,” he said.

“The shift in global sentiment overnight has given the Australian dollar a slightly negative hue on the day.”

As the Australian dollar continues to fall, more and more Australians are choosing to stay at home rather than travel overseas according to data from St George Bank.

The report shows that up to 45% of Australians are putting off International travel because of the falling Aussie dollar.

The TRA’s assistant general manager Tim Quinn said during the last year there has been a significant reduction in Aussies travelling abroad.

“There has been a real sudden decline in Australians’ propensity to travel overseas,’’ he said.

“Following significant year-on-year increases in outbound travel commencing in the mid-2000s, the rate of growth in outbound trips is now showing signs of softening compared to when the Aussie dollar was around parity with the US dollar”.

“It’s domestic tourism which has picked up, driven by solid growth in the visiting friends and relatives segment, a segment worth $12.4 billion.”

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The Australian dollar took a dive yesterday after a shock decision by the Bank of Canada to cut Interest rates and speculation that the proposed ECB stimulus plan will be much larger than most analysts expected.

At 5.40pm (AEDT) the Australian dollar is trading at US80.68c down from a high of US80.32c in yesterday’s trade

The Bank of Canada, in a surprise to the market cut its benchmark rate to 0.75%, from 1.00% in an effort to prop up the economy after lower inflation, and to offset the fall in oil prices, which have fallen more than 50% this year

Westpac senior currency strategist Sean Callow noted that the Australian dollar reacted negatively to the decision, dropping sharply after the announcement,
"The Australian dollar and the New Zealand dollar tumbled in sympathy with the Canadian dollar as the Bank of Canada delivered a shock rate cut," he said.

"It is very rare for the Australian dollar to respond to Canadian news but markets are obviously edgy about the Reserve Bank of Australia interest rate outlook."

“The Reserve Bank of Australia should open their eyes and use this as a wakeup call,” noted analysts from Fibogroup forex brokers

The main factor in the Canadian banks decision to cut Interest rates was the sharp fall in oil prices and with Australia’s biggest commodity Iron ore suffering the same fate at the moment the Reserve Bank of Australia may have to follow suite and also reduce rates”.

Using slightly stronger wording was Market Economics managing director Stephen Koukoulas who said that the RBA can’t just sit on their hands and should act at the next board meeting on February 3rd,

"I wouldn't say it's urgent but if they don't cut in February I don't know what's going on with them," he said.

"It's just absurd and the RBA can't let it stand."

Also pressuring the Australian dollar yesterday was news that the European central bank plans to spend more during their stimulus program to kick-start the economy than originally planned. Analysts now expect a figure of €50 billion a month until December 2016 to help the Eurozone fend off deflation.

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On Monday the Australian dollar fell to a new 5½ year low as worries over the quantitative easing program in Europe and the Greek election results, where the Anti austerity party Syriza won by an overwhelming majority with a promise to renegotiate Greece's debts.

At (AEDT) the Aussie dollar was trading at US79.09c after falling as low as US78.56c in early trade.

With 97% of the votes counted, the leftist party Syriza was set to have 149 seats in parliament, one short of the 151 it needs to rule outright but will have no trouble finding a smaller party who agrees with their principles,

A the top of the party's agenda, and creating uncertainty in the financial markets, is the planned restructuring of the credit given to Greece by the "troika" to bail them out of the 2008 financial crisis in return for sharp Austerity measures.

The “troika” consisting of the European Central Bank, the European Commission and the International Monetary Fund have lent Greece money to keep it afloat in recent years.
With last week's decision by the Bank of Canada to lower interest rates and the European Central Banks planned quantitve easing program analysts now believe that the RBA will have to start some sort of their own monetary program by lowering interest rates.

"What we're seeing is a lot of central banks are making surprise decisions at the moment ,Canada, India, Denmark. So in this environment of central banks pushing rates down and adopting easing strategies it becomes a lot more respectable to do that," noted Westpac chief economist Bill Evans.

"After the Bank of Canada, an RBA move downward "wouldn't surprise the market as much", Mr Evans said.

The rates market is now factoring in a 40% chance of a rate cut at the RBA's next meeting in February.

The Key to the RBA's move on interest rates will be the release of the latest CPI figures from Australia due out later this week where the Central bank will be hoping the number meets their target Inflation range of between 2% and 3%.

Anything less may see them making a move on rates in February as a growing number of analysts are starting to predict.

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The Australian dollar is sitting tight today gearing up for a round of important news due out this week.

At 6.28pm (AEDT) the Aussie dollar was trading at US79.22¢ virtually unchanged from yesterday.

The first round of news to hit the market is the durable goods number today from the US where analysts expect a number of 0,5% in stark contrast to last month's reading of -0.9% which may see the Australian currency drop back below the US79.00¢ mark.

The highlight of the week will be the latest CPI numbers from Australia where the consensus is for a number of 1.8% well down on last month's 2.3% and under the RBA's inflation target of between 2-3%.

"The news may be make or break for the RBA concerning interest rates" noted analysts at Fibogroup forex brokers.

"If the number comes in under expectations and especially by a big margin we could see the Central Bank move on rates as early as February to lift inflation back towards the target rate.
The falling CPI numbers have come about on the back of lower oil and food prices as well as sluggish wage growth. Most analysts agree that a weak inflation number is needed this time round in order to spur the RBA into action to move on rates.

Later on Wednesday the US Federal reserve will release their latest interest rate decision as well as the following monetary policy statement where the focus will be on the timing of an interest rate rise.

Even though Inflation in the US is under the Fed's target, a number of other indicators are moving ahead like the unemployment rate and consumer spending.

This should be enough to keep the Central bank on course to lift interest rates at sometime in the nearest future with some noting that April may be a possibility.

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The Australian dollar broke through the US80¢ mark today after the latest CPI figures came in only slightly under what most analysts had expected.

The local currency is now trading at US79.70¢ after reaching a high of US80.23¢ directly after the announcement

The Australian Bureau of Statistics reported on Wednesday the consumer price index rose by 2% in the December quarter bringing the total inflation to 1.7% for the year. The number was just short of analysts’ expectations of a 1.8% rise but is a sharp fall from the 0.5% and 2.3% in the September quarter.

Western Union Business Solutions currency strategist Steven Dooley said the number surprised the market given the recent run of poor inflation numbers from other countries,

“It was a huge shock to markets, especially when there’s been so much conjecture about whether the Reserve Bank would cut rates at its February meeting,” he said.

“Markets have taken this as a clear sign that this is off the table, underlying inflation remains firmly in the lower end of the RBA’s target band and on the back of that strong jobs number we had earlier in the month it certainly seems that there is no desperate imperative for the RBA to cut rates.”

The focus will now be on the latest interest rate decision from the US Federal Reserve due out later today where the central bank is expected to take a tough stance and move ahead with their planned interest rate rise later in the year.

“The statement from the Fed may determine whether the Aussie dollar breaks back above the US80¢ mark or falls back below the US79¢ mark” noted analysts from Fibogroup forex brokers.

“The consensus is that they will take a hawkish stance and indicate a potential interest rate rise so we may see the Australian dollar give up the gains from today”.

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The Australian dollar is back below the US80¢ mark today after yesterday's statement by the US Federal Reserve and reports that the Reserve bank of Australia is considering an Interest rate cut.

An article by renowned Business reporter Terry Mccrann noted that it was almost certain that the RBA would cut interest rates after their next board meeting on Tuesday,

"A lot of things have changed since the RBA’s last meeting and rate statement in December. They are all are rate-cut positive, so to speak" Mccrann wrote

"The two big negatives are the Swiss move to delink the franc and the, true, not exactly unexpected, moved to QE by the ECB. But expected or not, the outcome is to further flood global markets with liquidity and depreciate the euro".

In regards to the recent declines in the oil price and the effect on the economy he noted,

"The big plus is of course the fall in the oil price — although the reaction has mostly been gloomy. In the longer run a lower oil price would argue against rate cuts, as it would tend to boost growth. But in the short run it works the other way, as it is yet another — and big — deflationary driver".

"The combination of central bank money printing and yet spreading deflation would by itself make it hard for the RBA to continue to stand alone in the world with its “high” 2.5 per cent official rate while (almost) everyone else is zero-plus money printing"

In another blow to the Aussie dollar yesterday the US Federal Reserve said the economy was expanding rapidly which most analysts took as a sign that they are on track to raise rates in the nearest future which will narrow the gap between the two countries.

Rates in Australia currently stand at 2.5% while in the US the rate sits at 0.25%.

Although they mentioned the word "patient" in the timing of an interest rate rise they noted the recent strength of the employment market and that it would only be a matter of time before the weakness in inflation caused by a slump in the energy sector would subside.

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The Australian dollar tumbled overnight hitting a fresh 5.5 year low weighed down by falling commodity prices and expectations that the Reserve Bank Of Australia is bound to cut interest rates next week or in March the latest.

At 4.46pm (AEDT) the local currency was trading US77.91c after reaching a low of US77.18c in yesterday's trade.

Three of the four major banks in Australia now agree that the RBA will cut rates soon although they predict that the first move will come in March.

Looking forward, Commonwealth Bank's chief currency strategist Richard Grace noted that the Futures market is a sign of the sediment surrounding the Australian dollar at the moment,
"If you look at the 30-day futures, which is a good measure of where interest rate expectations are, from a current cash rate of 2.5 per cent they've got interest rates priced down to 1.9 per cent by March 2016," he said.

On the timing of the first interest rate cut for the year by the RBA he also noted,

"The speculation around next week's cut still remains around that 50 per cent probability, with 2.35 per cent priced in, but you've got almost a full rate cut priced in for March, so if they don't move next month the speculation is they'll move in March."

Also pressuring the Aussie dollar yesterday was the slump in iron ore prices hitting a new 5 year low in yesterday's trade.

The price of Australia's biggest export fell to $US62.70 a tonne, down 0.2% from the previous day, reaching levels not seen since 2009.

According to Piet-Hein Ingen Housz, global head of metals at ABN Amro Bank NV, investors shouldn't hold their breath for a recovery in the iron ore price any time soon as big companies ramp up production at a time when the market is already flooded, to grab a bigger piece of the market,

“My crystal ball says iron ore will remain low. Demand in winter is usually lower than the rest of the year as steel mills cut output before the Lunar New Year, while the so-called big four miners are producing more than ever to gain market share and weed out smaller producers" he said.

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The Australian dollar is hovering below the US78.00¢ mark today as the market awaits tomorrows key interest rate decision by the Reserve Bank of Australia with more and more analysts now predicting a rate cut.

At 6.50pm (AEDT) the Australian dollar was trading at US77.87¢ up from US77.57¢ at close of trade on Friday.

With inflation now running below the RBA's preferred target of between 2-3% and set to fall further throughout 2015 the central bank may be readying to cut 0.25 basis points from the current rate of 2.5%.

Also of a concern, and another catalyst for a rate rise is the unemployment rate which remains stubbornly high with analysts predicting the number to move higher later in the year.
Financial markets are now pricing in around a 60% chance of a rate cut tomorrow and a 100% chance of a rate cut as the year unfolds.

There are some however, going against the trend like CommSec chief economist Craig James who says the continuing growth in real estate prices and potential inflationary fears may see the RBA leave rates on hold out of fears of adding more pressure to the already sky high property values

Prices, especially in Sydney and Melbourne continue to rise sharply growing 1.4% and 2.7% respectively last month, putting more pressure on homebuyers and pricing more people out of the market.

“The latest economic data have shifted the balance of risks in favor of rates being left on hold,” James said.

“While global deflationary forces support the case for an easing of domestic monetary conditions, the risk is that another rate cut will lead to unsustainable strength in domestic home prices and contribute to inflationary risks".

“The strength of the housing market will clearly feature at the Reserve Bank board meeting.”

Market Overview by FiboGroup