Market Overview by FiboGroup - 2015

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The Australian dollar has drifted higher today following on from yesterday’s decision by the RBA to keep interest rates on hold and brushing off weak GDP numbers released earlier today.

At 10.36am (GMT) the Aussie dollar was trading at US78.28c up from US78.14c at yesterdays close.

Gross domestic product out of Australia grew 0.5% in the last quarter of the year, slightly below expectations of a 0.6% increase.

The yearly figure came in at 2.5%, continuing its downtrend which analysts attribute to the end of the mining boom.

Although the RBA left rates on hold yesterday, the latest GDP figures may be a catalyst for the central bank to move on rates in April as the economy struggles to come to terms with the end of the mining boom.

“The soft growth outcome reflects falling mining investment, weak public spending and a large subtraction to growth from inventories,” said Felicity Emmett, economist at ANZ Bank.

“We expect the Reserve Bank of Australia to cut the cash rate by a further 25 basis points in April.”

The downward trend will have a snowball effect as businesses cut back on investments and workers, which will only add to the unemployment rate which currently sits at a 13 year high of 6.4%.

"The good news is we've now completed 23 years of continuous growth," said Michael Blythe, chief economist at Commonwealth Bank. "The bad news is we're still running below trend, which will keep upward pressure on the unemployment rate and the RBA (Reserve Bank of Australia) on rate-cut watch."

The retail sales figure from Australia is due out on Thursday which may show a further lack of confidence in consumer spending adding to the case for a rate hike and putting a lid on the Australian dollar’s recent gains.

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In his speech at a conference in Sydney today deputy governor of the Reserve Bank of Australia Philip Lowe noted that wage growth in Australia remains slack, raising concerns amongst the Australian population about losing their jobs,

“One other change to the global monetary transmission mechanism that has echoes in Australia is the behavior of wages. As in many other countries, wage growth in Australia has been quite subdued and lower than would be suggested by most of our standard models,” he told the conference

“Increased job uncertainty is likely to be one of the factors here, with consumer surveys showing high levels of concern about future unemployment”. He also added.

Inflation in Australia is drifting below the central bank’s target rate with the governor mentioning that lower wages were a prime reason behind the trend,

“This low level of wage growth is contributing to quite low rates of inflation in a range of service industries”.

On the topic of the Australian dollar, the Mr. Lowe noted that the currency is still overvalued with external forces playing a big role,

“The scale of global monetary stimulus means that our exchange rate remains relatively high given the state of our overall economy,” he said

“The end result here is that global developments have left us with a higher exchange rate and lower interest rates than would otherwise have been the case. We may not like this configuration, but developments abroad give us little choice.”

The Australian Bureau of Statistics reported today that retail sales increased by 0.4% last month to $23.88 billion significantly higher than the 0.2% last month.

The number is a good sign and there should be more good news to come concerning the retail sector noted Deutsche Bank chief economist Adam Boyton,

"Looking ahead, we think there is a reasonable prospect of a lift in the retail sector, especially given lower petrol prices, lower interest rates and signs of renewed strength in the housing market." He said

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The Australian dollar is trading slightly lower today awaiting key employment data out of the US which may determine the timing of an interest rate hike by the US Federal reserve.

AT 8.12am GMT the Australian dollar was trading at US77.96c down from US78.06c in yesterdays close

The forecast for the Non-farm payrolls figure today is 240.000 down from last month’s reading of 257,000 and the unemployment rate is predicted to fall to 5.6% down from 5.7%.

ANZ senior foreign exchange strategist Daniel Been noted that a strong non-farm payrolls figure today may force the US Fed to hike interest rates in June

'If we get a strong number tonight, it will likely sharpen people's expectations that we will see a June rate rise,' he said.

'A weak number will not be leapt on too greatly and actually, it will be seen by most as opportunity to sell Aussie dollars at better levels,' he added.

Capital Economics, an economic research group has predicted that the Australian dollar is headed to US70c by the end of the year as the Reserve bank of Australia cuts rates to as low as 1.5%.

"A larger fall in Australian interest rates than the markets expect and more rate hikes in the US will drive down the dollar to a six-year low," Paul Dales, chief Australia & NZ Economist for Capital Economics, said.

"It could even fall to US65c next year as the RBA keeps rates at 1.5 per cent and as the Fed hikes further."

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The Australian dollar is trading sharply lower today as strong employment numbers out of the US increased the pressure on the US Federal Reserve to hike interest rates

AT 2.52pm (GMT) the Aussie dollar was trading at US77.21c down from US78.01c in Fridays close.

Statistics from the US Labor Department late Friday showed that the US economy added 295,000 jobs in February, well above analysts’ expectations for a number of 235,000.

The unemployment rate fell to 5.5% compared to 5.7% in the previous month adding more strength to the overall job numbers.

The only downside in the report was the wage growth, with the average hourly wage rising just 3 cents to $24.78 an hour taking the yearly growth to around 2% and barely ahead of inflation.

Brushing of the growth in wages was Jim O'Sullivan, chief U.S. economist at High Frequency Economics who noted that it is only a matter of time before the falling unemployment rate give a boost to wage growth,

“Friday's figures provide more evidence that the labor market is recovering rapidly, with employment growth more than strong enough to keep the unemployment rate trending down” he said
, Falling unemployment "makes more acceleration in wages increasingly likely." he also added.

The 5.5% unemployment rate is quiet symbolic as this is the Feds target rate which signals a healthy economy,

"This is quite a symbolic change that increases the pressure on the Fed to hike rates in June," said Paul Dales, an economist at Capital Economics said.

Jim Paulsen, chief market strategist at Wells Capital Management, noted at the current pace, 5% unemployment is not out of the question which doesn’t go hand in hand with interest rates sitting near zero percent.

"I just can't imagine a Federal Reserve in this country arguing that we should have a zero interest rate structure when we have a sub-5 percent unemployment rate, or on the doorstep," Paulsen told CNBC.

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The Australian dollar continued it’s down ward spiral today, still reeling after the bumper employment numbers out of the US on Friday and expectations that the Chinese economy will need less stimulus than was first predicted.

At 1.31pm (GMT) the Aussie dollar was trading at US76.66c after hitting a low of US76.03c earlier in the day.

The monthly consumer price index from China came in at 1.2% against a consensus of 0.8% while the yearly CPI figure showed a reading of 1.4% against analyst’s forecasts of 0.9%.

The Australian dollar usually pushes higher in reaction to such positive news out of China as the country is Australia’s biggest trading partner but some may have read between the lines, taking into account the big picture.

Despite the rebound, the inflation rate is still less than half of the government's target of "around 3 per cent" for the year, writes Jamil Anderlini in Beijing.

"The main reason for the rebound in the CPI was the different timing of the lunar spring festival this year," said Chinese investment bank CICC in a research note on Tuesday.

"The monthly rebound in prices of fresh vegetables, fruit and pork was quite large and this was a reflection of the temporary impact of the lunar New Year. However, after seasonal adjustment there is still downward pressure on the CPI" they also noted

The latest CPI numbers may also have an effect on how far the Chinese government will go to stimulate the economy out of fear they may stoke instability in the long term.

"The lower target is credit positive because it underscores the administration's commitment to achieving a more sustainable but still high rate of expansion that does not jeopardize long- term macroeconomic stability through the buildup of excessive leverage," said Moody's Investors Service in a note.

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The Australian dollar is trading higher today after the release of the latest jobless figures, which showed a slight fall in the unemployment rate.

At 9.29am (GMT) the Aussie dollar was trading at US76.71 after falling through the US76c mark in yesterday’s trading.

Data from the Australian Bureau of Statistics revealed the unemployment rate fell to 6.3% down from 6.4% a month earlier on the back of 15,600 new positions, coming in line with expectations.

Many see the result as temporary with the RBA still committed to cutting rates for the second time this year possibly in April

"We do not view the improvement in the unemployment rate as a change in the upward trend," said Australia and New Zealand Banking group's co-head of Australian economics Riki Polygenis.

"For the RBA, the unemployment rate is only just shy of its forecast peak of 6.4 per cent," she said.

The Australian dollar is heading down towards the RBA’s target level of US75c, which may bring some level of comfort although most expect that the central bank will continue to cut rates,
"We continue to expect further easing from the RBA in the first half of the year, most likely at the next board meeting in April."

The jobless rate remains at a 13 year high as the Australian economy comes to terms with the end of the mining boom which pulled the economy along for the last 20 years,

"We do not view the improvement in the unemployment rate as a change in the upward trend," ANZ Bank`s co-head of Australian economics Riki Polygenis said.

"Below-trend growth outcomes -- both past and expected -- are consistent with a further gradual rise in the unemployment rate from here, with new hiring insufficient to keep pace with retrenchments in industries such as mining and manufacturing."

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The Australian dollar failed to take advantage of disappointing US retail sales figures today, giving up most of the gains made earlier on in today’s trading.

At 3.47pm GMT) the Aussie dollar was trading at US76.29c down from US77.00c in yesterdays close.

The local currency jumped as high as US77.08c after the announcement that US retail sales fell 0.6% in February against analysts’ expectations of a 0.3% rise, bringing into question the timing of an interest rate hike as consumers reign in spending.

Brushing off the disappointing numbers was Michael Feroli, JPMorgan Chase & Co.’s New York-based chief U.S. economist who noted that the terrible weather conditions may have played a big part in the poor figures and investors should pay attention to the big picture including the robust labor market,

“It’s not disastrous, There could be some weather effect holding back retail sales. We still have a very good labor market and a lot of other things that are supportive of spending.” He said.
Paul Ashworth an economist from Capital Economics noted that although sales were disappointing it would only be a matter of time before lower gas prices and wage growth would filter into the economy,

“There is no denying that the lack of evidence of a pick-up in consumption growth is disappointing given the boost to purchasing power from lower energy prices,” he said

“But even though we haven't seen it feeding through yet, we do still expect to see that acceleration soon. The biggest driver of real consumption growth is real incomes, and those incomes have been rising at a dramatic pace recently.” He also noted

“It’s just more evidence that there is a negative bias towards the Australian dollar at the moment and we can only expect further losses” noted analysts from Fibogroup forex brokers.

“The US retail sales figure was way off the mark but it still wasn’t enough to keep the Aussie dollar above water so looking to the future it looks pretty grim for the currency”.

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The Australian dollar is sitting tight today, ahead of Tuesday’s minutes meeting from the Reserve Bank of Australia as the market awaits direction on monetary policy and in particular, the timing of another interest rate cut.

At 1204 pm (GMT), the Aussie dollar was trading at US76.41c slightly up from US76.34c at close of trade on Friday.

In their last meeting, the RBA kept rates on hold at 2.25% catching the market off guard with analysts now predicting the central bank will slash rates again in April to help kick start the economy after the end of the mining boom which ran for 2 decades.

Stephen Miller, the Sydney-based head of Australian fixed income at BlackRock, noted that he expects the RBA to cut rates by a further 50 basis points this year bringing the cash rate to 1.75%, which will see the currency fall to around US70c before years end.

"We anticipate further rate cuts; we're seeing significant declines in the prices of Australia's commodity exports, If we put all those things together, we could well see the Aussie dollar down towards US70¢ in the second half of this year."

If the Australian dollar survives the minutes meeting tomorrow it may only be short lived as the US Federal Reserve releases its latest interest rate decision on Wednesday followed by the accompanying monetary statement.

The market is now expecting the US central bank to lift interest rates in June from a record low of 0.25% which will mark the first increase since the global financial crisis.

The Fed is expected to take a hawkish stance regarding the US economy; especially in regards to the robust employment market which may see the Australian currency come under pressure as the US economy gathers momentum.

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The Australian dollar remains flat today after disappointing factory data out of the US and the latest minutes release from the Reserve Bank of Australia.

At 6.13pm (AEDT) the Aussie dollar was trading at US76.38c down from US76.40c in yesterday’s trade.

U.S. industrial production increased 0.1 percent in February, less than the 0.2% expected by analysts although up from -0.3% in the previous month.

Industrial capacity utilization came in at 78.9 slightly below expectations 79.5 and down from 79.1 in the previous month.

The disappointing numbers lead some to believe, including BK Asset Management managing director Kathy Lien that The US Federal Reserve will be in no hurry to lift interest rates at their meeting scheduled for tomorrow,

"We had broad-based weakness in US data ... all surprising to the downside," she said

"All of this led investors to believe that the US Federal Reserve will be emphasizing patience at this week's meeting." She also added.

In the release of their latest minutes meeting today the RBA also weighed in on the US interest rate debate by noting that analysts and the US Fed see things differently on the timing of an interest rate rise,

“Market expectations for increases in the US federal funds rate had been brought forward over February, following better-than-expected employment data. It remained the case, however, that the markets implied future tightening of monetary policy was considerably more drawn out than the expectations of members of the Federal Open Market Committee”, the bank noted

Explaining their decision for keeping rates on hold this time round, the RBA noted that time was needed in order for the economy to reposition itself,

“In considering whether or not to reduce the cash rate further at this meeting, members saw benefit in allowing some time for the structure of interest rates and the economy to adjust to the earlier change” they said

“Taking account of all these factors, members judged it appropriate to hold the cash rate steady for the time being”, they also added

Leaving the door open for further rate cuts the central bank also noted that further rate cuts may be needed in order to keep the economy moving forward,

“Further easing over the period ahead may be appropriate to foster sustainable growth in demand while maintaining inflation consistent with the target.”

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The Australian dollar is sitting tight today as the market awaits the latest Federal Reserve meeting with the focus on the timing of an interest rate rise.

At 5.23pm (AEDT) the Aussie dollar was trading at US76.11c slightly down from Us76.20 in Yesterdays close.

A growing number of Analysts are now predicting that the US central bank will lift interest rates in June as the US economy gathers momentum, which will mark the first move in 7 years.

Peter Hooper of Deutsche Bank noted that the Fed may drop the word “patient” from their statement, but will still remain neutral and asses the need for an interest rate rise on a meeting by meeting basis,
“The strong consensus is that they will decide to drop the patient language. Janet Yellen made this clear in a testimony some weeks ago” he said

Although the tone of the meeting may be slightly hawkish, Inflation is still causing a headache for the Fed as slow wage growth, lower oil prices and a strong US dollar, which makes imported goods for American consumers cheaper, create a fear that prices may fall even further.

“It does open the door also to a rate hike this summer - either June or September. However, Janet will say so in the press conference tomorrow that this opens the door for June, but June is not necessarily the most likely, they need to see some more data”. Mr Hooper noted

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