Currency Markets Not Impressed as Australia Raises Interest Rates to 4%

Key Overnight Developments

• Japan’s Jobless Rate Unexpectedly Falls But Employment Still Lackluster
• Australian Retail Sales Top Expectations, Remain Below Trend Growth
• Currency Markets Not Impressed as Australia Raises Interest Rates to 4%


Critical Levels



The Euro and the British Pound tracked slightly lower in Asian trade, slipping 0.2 and 0.4 percent respectively against the US Dollar. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.


Asia Session Highlights



Currency markets were visibly unimpressed after the Reserve Bank of Australia raised interest rates to 4.0 percent, with sharp Australian Dollar volatility as the announcement crossed the wires culminating in an essentially flat outcome against the majors. RBA Governor Glenn Stevens struck a markedly hawkish bias, saying that “with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average,” which presumably means anywhere between 5-6 percent given where borrowing costs have been over the past two decades. Stevens added that today’s decision was “a further step in [the] process” of returning to this average, explicitly signaling that further hikes are on the way. The market’s apparent lack of excitement may be linked to a belief that the central bank is on a path to overshoot on monetary tightening considering the threat posed to Australia’s mining sector – arguably one of the most important engines of the country’s economic growth – from China’s aggressive moves to slow expansion amid fears the south Asian giant may overheat.

Separately, Australia’s Retail Sales added 1.2 percent in January – topping economists’ forecasts for a more modest 0.5 percent increase – with Department Store and Apparel sales driving receipts higher with impressive gains of 7.4 and 2.9 percent, respectively. Looking past month-to-month volatility at the overall trend however, the outcome seems far less optimistic than the headline figure would suggest. Indeed, sales grew 3 percent from the previous year, rebounding from a 13-month low in the annualized growth recorded in the previous month but falling significantly short from the long-term trend average at 6.6 percent. To that effect, it may be premature to sign off on the return of consumer-led economic growth in Australia for the time being until further evidence emerges.

Japan’s Unemployment Rate fell to 4.9 percent in January from a revised 5.2 percent in the previous month. The number of unemployed workers fell by 160,000 while the labor force grew by a hefty 480,000, suggesting the drop in the jobless rate can’t be chalked up to increasingly discouraged applicants giving up the job search (and thereby no longer counting as “unemployed”) as had been the case in recent months. The Transportation, Retail Trade, and Medical sectors led gains in new employment. Interestingly, the number of people working more than 35 hours per week increased by over half a million workers while part-time employment fell by a similar amount, seemingly reflecting a cautious optimism among employers considering full-time positions imply higher wages and longer contracts. Looking past the upbeat headline figure however, it is important to note that the number of employed workers is still 1.5% lower than a year ago having recovered less than half of the drop from the peak in December 2007, hinting that any recovery that may be underway is young and fragile.


Euro Session: What to Expect



Switzerland’s Gross Domestic Product is set to grow 0.4 percent in the fourth quarter, marking the second consecutive period in positive territory and the largest expansion since the three months through March 2008. On balance, the outcome is unlikely to stir much of a reaction considering its limited implication for monetary policy. Indeed, a Credit Suisse gauge of priced-in expectations shows that traders forecast virtually no probability of a rate hike at next week’s Swiss National Bank policy meeting and see Chairman Philipp Hildebrand and company adding just 18bps to benchmark borrowing costs over the next 12 months. As for the SNB’s policy of intervention into the EURCHF exchange rate, this has been on the backburner for some time as the markets noticed that the central bank quietly shifted its strategy to managing the pace of the Franc’s appreciation against the single currency rather than defending a particular price level.

Meanwhile, a preliminary estimate of February’s Euro Zone Consumer Price Index is expected to see the annual pace of inflation pull back to 0.9 percent from 1.0 percent recorded in the previous month. On balance, this too is likely to go largely unnoticed with the European Central Bank likely content to remain on the sidelines for now. Indeed, with inflation out of negative territory but still below the 2 percent target level, Jean-Claude Trichet and company can afford to retain a wait-and-see posture considering the difficult task of balancing the competing objectives of stronger and weaker Euro Zone economies amid a brewing sovereign credit crisis. Traders seem to agree, seeing no chance of a rate hike at this week’s policy meeting.


For real time news and analysis, please visit http://forexstream.dailyfx.com

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com