Although Governor Stevens expressed confidence in the Australian economy, he also stated that, ”Credit conditions remain difficult in some major countries as banks continue to face loan losses associated with the period of economic weakness. Concerns regarding some sovereigns remain elevated.” We wrote yesterday that RBA’s monetary policy stance will be guided more by the lackluster global macro economic conditions rather than the relatively impressive performance of the Australian economy and continue to believe that any material slowdown in China will put halt on any future RBA rate hike.
Nevertheless, Australia remains the best performing economy in G-20 and the Aussie still represents the best bet on risk in the currency market. Despite its lack of response to the latest RBA rate hike, the AUD/USD has held up well in comparison to euro or sterling and should continue to outperform the other high beta FX pairs for the foreseeable future.
Meanwhile the euro saw a wave of stop hunting in mid morning trade setting a new yearly low at 1.3433 despite news out of Athens that the Greek government stands ready to enact further austerity measures of 5 Billion euros in an attempt to close its budget gap. Market sentiment however remains extraordinarily negative as consensus builds that even if the region survives the latest fiscal crisis, EZ interest rates will remain low for the foreseeable future and the ECB will lag the Fed by a wide margin in any move towards tightening.
In UK the pound found some support at the 1.4900 level after a fresh spate of polling data suggested that Conservatives are once expanding their lead in the wake of a speech by their leader David Cameron this weekend. On the econ front the UK PMI Construction release printed a tad weaker than forecast at 48.5 vs. 48.9. but markets ignored the news and rallied sterling towards 1.4950 in the aftermath of the release. Cable is now trading on sovereign risk dynamics rather than micro economic data and to that end any piece of polling that suggests a positive resolution to the UK election will likely help the currency in the near term.
In North America today the focus will be on Canada where the BOC is expected to keep rates at 25bp but perhaps signal a more neutral monetary policy stance in light of strong Canadian economic data that showed Q4 GDP rising to 5%. Canadian real estate markets have seen a massive boom as BOC has maintained rates at record low levels and BOC monetary authorities must act soon in order to prevent a bubble in the housing sector. The market has been anticipating a more hawkish statement today, with loonie rallying against the dollar all night long.