cross markets data reaction

Will The RBA Respond To Monday's Impressive Data Flow?

Monday, 02 April 2007 23:22:35 GMT  |  John Kicklighter and Terri Belkas, Currency Analyst

Trade Balance (FEB) (01:30 GMT; 21:30 EST)	RBA Rate Decision (23:30 GMT; 19:50 EST)
Expected:                  -A$1.254B	Expected:                  6.25%
Previous:                   -A$0.876B	Previous:                   6.25%

How Will The Markets React?

 

The Australian dollar surged against its liquid counterparts Monday morning after a number of high-ranking economic releases raised the bar on the impending RBA rate decision. Officially, the Reserve Bank ofAustralia monetary policy board is expected to keep the overnight cash rate unchanged. However, most of the fundamental data that has hit the wires since the last meeting has helped to support the minority hawk’s projections of a rate hike. Only days after the central bank kept the benchmark lending rate at 6.25 percent in early March, the Australian financial markets had their first taste of bullish news. Fourth quarter GDP surprised economists when the numbers beat expectations on both the quarterly and annual time frames. For the quarter, the economy grew 1.0 percent through improvements in exports, consumer spending, and business investment. Since then, the data had died down somewhat – that is until Monday. Namely, those three indicators were retail sales and building approvals for February and the TD inflation index for March. The price gauge kicked things off with the most conservative surprise. For the month, consumer-level inflation accelerated to a 0.5 percent clip; though it was the year-over-year number that interested rate watchers. Though the yearly report only advanced from 3.4 to 3.5 percent, it remains the only timely price gauge available to the market; and it is clearly above the central bank’s 2-3 percent target band. Next up, the retail sales report took traders by surprise with a 0.9 percent jump, the biggest in ten months. Finally, the building permits report, the least market-moving number, put up the biggest surprise with a 10.6 percent surge in approvals – the most since August of 2003. Armed with this slew of data, participants in the short-term interest rate arena lifted the yield on the June contract to new highs. However, while there are greater expectations of a hike, such a decision would still incite a volatile reaction from the markets.

 

Bonds – 10- Year Australian Government Bonds

 

Australian government bonds, diverging from equities and the Australian dollar, saw little action after Monday’s economic releases hit the tapes. In fact, the yield on the ten-year bond contract barely moved. Now, at 5.896, there will be considerable distance to close before price action can put pressure on 5.955 resistance. There will be one last chance to cover some of this gap before the RBA’s decision with the February trade report. On the other hand, should the deficit balloon as expected, it would only pull yields lower. Looking to the more probable outcome, a pass could ultimately mark the end of the recent rally. Revealing some of the stretched hawkish sentiment in the market, yields began their nearly 30-point rally on bullish comments made by the RBA’s Edey on the 15th.

FX – AUD/USD

 

The Australian dollar has racked up impressive gains during March, as the AUDUSD pair surged nearly 400 points – or 5 percent – from the lows made earlier in the month. In fact, Aussie continues to make new highs as the currency made a solid break through significant resistance at .8100 yesterday on the back of a much stronger than expected retail sales report and a jump in building approvals. The improvements in the economic indicators raised the prospects of a rate hike by the Reserve Bank of Australia, as the central bank’s benchmark of 6.25 percent has failed to cool the economy and ease price pressures. With carry trade differentials already working strongly in favor of Aussie longs, it’s no wonder the currency has managed to rally at a breakneck pace. While analysts currently predict that the RBA will leave rates steady until May, the central bank may already have the impetus to tighten monetary policy sooner rather than later. Nevertheless, policy action by the RBA would surprise traders and could send AUDUSD to test the ten year high of .8215. However, the Australian central bank does not issue a statement if they don’t adjust rates, so a steady hand may bring a bout of Aussie relief selling, as there will be no hawkish commentary available to buoy AUDUSD.

Equities – ASX 200 Index

 

Australian equities ended the day lower as an unexpected surge in retail sales and a jump in building approvals increased speculation of a rate hike by the Reserve Bank of Australia this week. The 79.2 point drop in the S&P/ASX 200 Index to 5915.80 was led by shares in the banking sector as Commonwealth Bank dropped 66 cents to A$49.60 while National Australia Bank lost 38 cents to A$40.02. Australia’s benchmark equity index could see further declines on Tuesday if the RBA decides to raise interest rates to 6.50 percent. Indeed, while the market current expects to central bank to wait until May to hike rates after the April 24 inflation report, continued gains in consumer spending and in the housing market may give the RBA enough impetus to take action sooner. Such an unexpected monetary policy move could send the S&P/ASX 200 down to trendline support near 5,750.00. However, if the RBA leaves rates at 6.25 percent as forecast, traders may buy up equities, especially in the banking sector, as they consider the possibility that the central bank will leave the benchmark steady for the next few months.

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