Price action in currency markets is starting to pick up after a dull start to the week, spurred by the Reserve Bank of Australia announcing they would be cutting the overnight cash rate for the second time this year, reducing the lending rate by 25 basis points to 2.0%. While the move to slash the overnight rate had been widely expected leading up to the announcement, it was the RBA’s outlook for the Australian economy going forward that surprised market participants somewhat. The aussie was initially hammered lower after the decision to make monetary policy more accommodative was announced and Governor Stevens reiterated further depreciation in the domestic currency seems both “likely and necessary, particularly given the decline in key commodity prices.” However, the aussie was able to swiftly recoup its earlier losses as the RBA saw their inflation views consistent with their target over the next two years, and that there are improving trends in both household demand and employment growth. Though the RBA’s easing cycle might not be over just yet, the tone and language of the rate statement suggests the bar for additional cuts has moved substantially higher, shifting the overall bias of the RBA from dovish to more neutral on the monetary policy spectrum. AUDUSD has moved off its overnight lows and is changing hands in the high-0.78s, with focus for the antipodean currency now moving to the release of employment figures on Wednesday night.
The increase in political posturing over the Greek debt negotiations continues to take a toll on the euro, which in turn has helped keep the DXY on firm footing to begin the week. The lack of progress has started to frustrate the IMF, who has now threatened to hold back a portion of the next aid tranche unless European lenders write off a significant amount of Greece’s sovereign debt. The threat stems from the fact that without proper reforms in place, Greece is forecast to run a primary budget deficit this year, and understandably, the IMF doesn’t appear to be willing to throw additional funds into the black abyss that is Greek government. In addition to the IMF funding concerns, the ECB is holding a non-monetary policy meeting to discuss collateral requirements for Greek access to its Emergency Liquidity Assistance window, which if haircuts on collateral are increased from the already assessed 23%, would make it extremely difficult for Greek lenders to cobble together the needed collateral in order to stay afloat. EURUSD has ebbed into the low 1.11s ahead of the opening bell in North America, though after today’s US trade balance data, the next big report of the docket will be Wednesday’s ADP Non-Farm employment change.
As we get set for the North American open, trade balance figures for the month of March were released for both the Canadian and American economies. Both countries saw their trade balances surprise to the downside with deficits growing by a larger amount than anticipated, but the spotlight was grabbed by Canada whose trade deficit came in at a whopping $3.0bn, far outpacing the $0.85bn that had been expected, while February’s deficit was revised from $0.98bn to $2.2bn. Although exports did not manage to keep pace with the value of imports, the decline in exported energy products was offset by an increase in motor vehicles and parts, providing the rotation (albeit at a lower magnitude) to the non-energy export sector that Poloz and the Bank of Canada are hoping to see. On the south side of the 49th parallel, the trade balance situation fared little better, with the US deficit expanding to $51.37bn from the $35.89bn posted in February. The big jump in imports will likely have negative implications for downward revisions to an already paltry growth rate in the first quarter, though the more significant question will be as to how substantial the trade deficit acts as headwind for growth in the second quarter. Front-month WTI jumped above $60 after the release of the US trade data, which has helped the loonie push USDCAD into the mid-1.20s despite Canada’s own disappointing trade figures.
Further reading:
Expect more weakness on AUD/USD, GBP/USD – Elliott Wave Analysis
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