Market Overview by FiboGroup - 2015

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The Australian dollar is trading slightly higher today after the RBA minutes meeting today where the central bank left the door open for further rate cuts, although not necessarily in March as a growing number of analysts had started to predict.

At 7.45pm (AEDT) the Aussie dollar was trading at US77.90c up from US77.84c in yesterday’s trade.

The RBA noted in today’s minutes meeting that they decided to cut interest rates to 2.25 per cent after a string of recent poor economic data.

Although the bank acknowledged that the latest interest rate cut had helped to push the Australian currency lower they mentioned they will be keeping a close eye on property prices, as any further easing of monetary policy may add fuel to the fire of an already sky high real estate market.

"Housing price inflation had moderated from the rapid rates seen in late 2013, but remained high and in Sydney and Melbourne had been well above the growth rate of household income," the RBA said.

The bank also noted there were some concerns over the amount of “Investor credit” compared to the level of “owner occupied housing credit”, and only time will tell whether moves from the Australian Prudential Regulation Authority would help curb this problem.

"Given the large increases in housing prices in some cities and ongoing strength in lending to investors in housing assets, members also agreed that developments in the housing market would bear careful monitoring," the RBA said.

“It would be important to assess the effects of the measures designed to reinforce sound residential mortgage lending practices announced by APRA in December."

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The Australian dollar is trending lower today as the market awaits the latest minutes meeting from the US Federal Reserve with most expecting the central bank to take a hawkish stance regarding interest rates.

AT 2.36pm (GMT) the Aussie dollar was trading US77.89c at down from US81.15c yesterday.

For the past 12 months the Fed has stuck with the word “patient” when it came to talk of an interest rate rise but some believe the tone will be different this time such as Mike Moran, chief economist at Daiwa Capital Markets America Inc who noted in an interview,

“I expect there was a fair amount of sentiment for dropping the word ‘patient’ in January, although obviously not a majority,”

“A strong push by some on the Fed committee to strip “patient” from the statement would signal that it is likely to be dropped at the next Fed meeting in March and put a June rate hike firmly on the table“ he added.

The only cloud hanging over the Feds decision to move on interest rates is the current inflation numbers, which have sat below the banks, preferred target rate of 2% since 2012 and may be a key factor today.

“Anything that gives us a sense of how willing they would be to hike, even against a low-inflation backdrop, will be important,” said Michelle Girard, chief U.S. economist at RBS Securities Inc. in Stamford, Connecticut.

“The big question in everybody’s mind is: can they raise interest rates without more tangible evidence, either in terms of wages or with the inflation numbers, that things are moving in the right direction?” Girard said.

The Australian dollar is expected to face a serious test holding on to its recent gains as this news hits the market.

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The Australian dollar pulled back in late trading on Thursday as Standard and Poor's warned that Australia's federal budget could be hit by global economic worries which may effect its AAA rating.

At 3.47pm (GMT) the Aussie dollar was trading at US77.87c after reaching a high of US88.46c in yesterdays trade.

Recent sharp falls in commodity prices and especially Iron ore, Australia's biggest export is having an effect on the local budget which may cause a downgrade in ratings,

"Australia's budget outlook has weakened sharply in the last six months as commodity prices have plunged," a Wall Street Journal report showed, citing S&P's sovereign analyst Craig Michaels.

"Sliding prices of coal and iron ore, the country's biggest export, are hurting economic growth, denting corporate profits, driving higher unemployment and eroding government tax receipts," he warned.

Some analysts think that the Aussie dollar may have hit the bottom like Market Economics managing director Stephen Koukoulas who said the Australian dollar may have bottomed out and now might be the time for a bargain,

"It is always, always, always difficult to pick bottoms in currency markets, but that is what I am trying to position for with the Australian dollar," Mr Koukoulas said on his blog.

"It is now time to think about getting cautiously long, and anticipate some greater risk of a return to US80¢ and even US85¢ than a scenario of a sustained break towards US75¢. Trades that profit from the AUD [Australian dollar] ending 2015 at US82.5¢ and higher seem to be risks worth taking."

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The Australian dollar has rallied today brushing off fears of a downgrade by the ratings agency S&P over potential budget problems in the nearest future.

At 3.50pm (GMT) the Aussie dollar was trading at US78.20c up from US77.89c in yesterday’s trade.

Ratings agency Standard and Poor released a statement yesterday that although Australia is in no immediate danger of losing its AAA credit rating, it needs to pullback on spending.

“The market brushed off the announcement pretty quickly,” noted analysts from Fibogroup forex brokers.

“Many Countries and economies like the Eurozone are printing money to stimulate their economy whereas in Australia this option is not even on the cards so we think the budget is not in bad shape”

The reserve bank of Australia along with many analysts are claiming the Australian dollar is still overvalued but that’s not the case according to Ray Attrill, the NAB’s co-head of Currency Strategy,

“The RBA may be right to suggest that a lower AUD would promote more balanced growth, but its claim that the AUD remains overvalued rings hollow.”

Further weakness “is justified only if key fundamental drivers move further against the AUD”.

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The Australian dollar was trading higher today but then gave back most of the gains as caution spread that the agreement reached between the Eurozone ministers and Greece on Friday about an extension of the bailout deal was far from certain.

AT 11.37am (GMT) the Australian dollar was trading at US77.96c after reaching a high of US78.43c earlier in the day.

The Greek government now have until the end of Monday to draw up a list of reforms which they say will include a crackdown on tax evasion and more transparency from the country’s oligarchs.

"We are compiling a list of measures to make the Greek civil service more effective and to combat tax evasion," minister of state Nikos Pappas told Greek television network, Mega channel.
Even if all goes well some say the deal is a sinking ship and in the end Greece will never have the ability to fully repay their debts which will only cause further turmoil in the financial and currency markets.

Greek debt is not repayable in this life, Kingsley Jones, founder and CIO of Jevons Global, told CNBC on Monday: "We have to be realistic here. Greek debt is now 175 percent of gross domestic product (GDP); it's higher than it was when this whole business first started."

"Just look at Japan. It has government debt rapidly approaching 300 percent of GDP. One day, that debt pile simply implodes. It is not ever going to be repaid, nor will the Greek debt. There is no use standing on the high moral ground," Jones said.

The Aussie dollar may sit tight as the market awaits key data later in the week from the US such as the latest speech from Fed president Janet Yellen for a direction on US interest rates and the wage price index from Australia which may provide some clues on Australia’s deteriorating unemployment rate.

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The Australian dollar is trading sharply lower today on the back of US dollar strength and expectations of a bullish speech this afternoon from Federal Reserve president Janet Yellen.

At 9.09am (GMT) the Aussie dollar was trading at US77.46c down from US78.00c at close of trade yesterday.

The US dollar has been somewhat range bound for the last few weeks but this could all change today as the market gears up for the timing of an interest rate rise in the US with most Analysts predicting the move will happen somewhere between March and June.

"The U.S. dollar has been in consolidation mode. If Janet Yellen comes out sounding fairly hawkish and suggests the rate hike cycle could start in the middle of the year, the dollar could rise," said ANZ senior currency strategist Khoon Goh

One indicator likely to concern the Fed is the current inflation rate in the US which currently sits under the central bank’s target of 2% due to a number of factors including tumbling oil prices and sluggish growth, with most expecting it to remain there for the foreseeable future.

Michael Carey, Chief Economist at Brittany Baumann noted that the Fed may choose to overlook this, pointing to the continuing strength of the labor market as well as strong underlying wage growth.

“On the inflation front, Chair Yellen will likely note that price inflation has moved further away from the Fed’s 2% target, largely reflecting the declines in energy prices. We expect her to underscore that inflation expectations remain relatively well anchored and hence the impact of lower energy prices is likely to be transitory but needs to be monitored carefully”.

He said “Confidence that core inflation will eventually firm towards the Fed’s goal would be strengthened by continued improvement in job market conditions and underlying real growth sufficient to support additional labor market gains and wage growth along with some pick-up in market-based inflation measures”. He also added.

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The Australian dollar is sharply higher today after yesterday’s speech by US Fed president Janet Yellen and positive numbers out of China.

At 6.36am (GMT) the Aussie dollar was trading at US78.81c up from US78.30 at yesterday’s close.

In her testimony to the US congress yesterday, Yellen testified that the US Fed would assess the economic situation on a month by month basis before making any move on interest rates.

She also noted that while some sectors of the economy were moving forward, inflation is still well below the central banks comfort zone and wage growth continues to underperform,
“There has been important progress, however, despite this improvement, too many Americans remain unemployed or underemployed, wage growth is still sluggish and inflation remains well below our longer-run objective.” Yellen said.

The flash HSBC/Markit Purchasing Managers' Index (PMI) for the month of February came in at 50.1 today, slightly above the all-important 50 point level which shows the economy is in growth mode.

Although the number was positive, the index shows there are still risks associated from a lack of foreign demand and the government may have to step in further to help stimulate the economy.

According to HSBC chief China economist Hongbin Qu there was "a marginal improvement in the Chinese manufacturing sector going into the Chinese New Year period in February”.
"However, domestic economic activity is likely to remain sluggish and external demand looks uncertain. We believe more policy easing is still warranted at the current stage to support growth” he said.

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The Australian dollar is trading lower today after a round of positive news from the US yesterday as well as weak local capital expenditure figures released earlier today.

AT 5.36pm (AEDT) the Aussie dollar was trading at US77.91c down from US77.98c in yesterday’s trade

Durable goods orders in the US rose for the first time in three months to a seasonally adjusted 2.8% well above analysts’ expectations of a 0.6% rise amid signs that the manufacturing sector may be stabilizing.

“After months of weakness, business spending appears to be on somewhat firmer footing,” Sterne Agee Chief Economist Lindsey Piegza said in a note to clients.
Although the numbers were positive she noted,

“Quarters of inventory gains are likely to keep business investment under pressure.”

The odds of another interest rate hike from the Reserve bank of Australia increased yesterday after weak capital expenditure figures hit the market,

Figures from the Bureau of Statistics showed capital expenditure fell by 2.2% last quarter, to $37.5 billion much bigger than the expected 1.6% drop.

Expectations of an interest rate rise from the RBA rose above 50% after the announcement up from 38% before the data was released.

ANZ's co-head of Australian economics, Felicity Emmett noted that businesses are pessimistic at the moment and are hesitant about investing further in the economy which is why the RBA needs to cut rates further,

"The ongoing weakness in the outlook will provide further confirmation to the [Reserve] Bank that the economy needs further stimulus," she said

"We continue to expect another near term RBA rate cut, most probably at the March meeting."

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The Australian dollar is trading lower today as expectations mount that the RBA will cut interest rates again tomorrow for a 2nd consecutive time bringing the cash rate to a historical low of 2%.

At 7.00am (GMT) the local currency was trading at US77.61c down from US78.06c at close of trade on Friday.

Disappointing capital expenditure figures released last week increased the chance of a rate cut amongst analysts to around 55% up from 38% before the release of the news.

The number came in at -2.2% well below analysts’ expectations of a -1.6% fall and clearly shows that confidence in the business sector is fading.

Adding more evidence that a rate cut tomorrow was on the cards was Commonwealth Bank senior economist Michael Workman who noted that the Australian central Bank has a history of reducing rates in consecutive months,

"Usually when they cut rates, they don't just do one out of the blue and stop. It's normally two," he said.

Providing some support earlier today for the Aussie dollar was the surprise decision from the Chinese Central Bank to slash interest rates in order to kick start growth in their flagging economy.

The bank said it would cut the rate by 25 basis points as part of their stimulus program to restore confidence into the business sector.

Bank of New Zealand strategist Kymberly Martin said the Aussie dollar initially spiked after the announcement before giving back the gains as traders digested the news and its effect on the Australian dollar,

"Clearly, the Australian economy is quite closely linked to China so the initial knee-jerk reaction is that if the Chinese economy is doing better, that will be supportive for Aussie exports," Ms Martin said.

"But if you look a bit more deeply, the cut leads to a weaker yuan or signals further cuts, so the longer-term prospects are actually not supportive for the Aussie dollar."

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The Australian dollar is trading higher today after a shock decision by the Reserve Bank of Australia to keep interest rates on hold today at 2.25%.

At 9.20pm (AEDT) the Australian dollar was trading at US78.22c up from 78.06c at yesterdays close.

Most analysts before the decision had expected the central bank to cut rates again, following up from the reduction in February to bring the benchmark rate to a record low of 2.00%.

One of the deciding factors may have been the current state of the housing market which is sitting at record levels and the central bank may have been afraid to add fuel to the fire.

Although the RBA kept rates on hold Governor Glen Stevens noted that the currency remains overvalued, particularly when you take into consideration the fundamental factors and noted,
“The Australian dollar has declined noticeably against a rising US dollar, though less so against a basket of currencies. It 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”.

Leaving the door open for further rate cuts he also noted that a close eye will be kept on inflation, with measures taken in order to reach the bank’s target rate,

“At today’s meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. 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. The Board will further assess the case for such action at forthcoming meetings”.

Australia and New Zealand Banking group chief economist Warren Hogan noted that the bank would probably move on rates in April to cover for the lack of non-mining investments flowing into the economy.

"A sustained non-mining recovery remains elusive, dependent on new investment outside of the property and construction sectors," he said.

"Over the medium term, the currency is critical and there is little evidence that it is having the desired positive impact on investment decisions and employment as yet."

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