News Stream Improves, ECB Continues To Weigh On Euro

The Reserve Bank of Australia defied expectations and left rates on hold earlier today. This has lifted the Australian dollar back to yesterday’s highs near $0.7845 where it stalled. The derivatives market had discounted nearly a 2/3 chance of a cut today. The RBA’s statement indicates the door is open to further easing, and most analysts will simply push out the expectation to April and May. We look for one cut in Q2 though some investment banks forecast two cuts. 

Tomorrow Australia reports Q4 GDP, and its is expected to have expanded by 0.6% after a 0.3% pace in Q3. Stronger retail sales and better net exports are thought to be the main drivers. Earlier today, Q4 current account was released. It stood at A$9.6 bln. The consensus was for a A$11 bln shortfall after a revised A$12.1 bln (from A$12.5) deficit in Q3. Net exports were 0.7% of GDP, slightly better than consensus. 

Separately Australia also reported building approvals. They jumped 7.9% in January. The consensus was braced for a 2% decline. The December series was revised to -2.8% from -3.3% initially reported. This is a volatile series, but it is the third month that the year-over-year pace has been north of 9%.  

Japan reported a larger than expected rise in labor cash earnings. The 1.3% increase compares with a consensus forecast of 0.5% and follows a similar rise in December (revised from 1.6%). After contracting in the April-September period, the Japanese economy finished the year on a up note.  The labor market has tightened, and political pressure has been brought to bear to encourage companies to raise wages.  However, adjusting for inflation real wages remain negative. The government and the BOJ are watching the spring wage round to see if the missing component of Abenomics begins to be seen. 

Meanwhile, the dollar has been pushed back below JPY120. Since February 12 when “sources close to the BOJ” opined that further yen weakness cut hurt consumer sentiment, the market has been reluctant to press ahead. Earlier today, Abe’s adviser Honda suggested the dollar was near the upper limit of its comfort zone.