After yesterday’s late-day surge in equities failed to produce a positive close, risk appetite is having a déjà vu moment with high-yielding asset classes under pressure ahead of the opening bell in North America. The Reserve Bank of Australia met overnight, and as expected decided to maintain its overnight lending rate at 2.0%, along with reiterating its dovish bias towards the direction of future monetary policy. Citing a slower than expected pace of global growth along with the moderation of demand from China, the RBA judged that should financial market turbulence result in weaker than expected global demand in the near future, the low pace of consumer inflation will allow the central bank room to ease further. With the Australian dollar bouncing around cyclical lows as Australia’s terms of trade continues to decrease due to a further decline in commodity prices, Governor Stevens made mention that the domestic currency was adjusting to the evolving economic outlook, but refrained from any specific action aimed at jawboning the currency lower. The domestic currency is off close to 1% against its American counterpart this morning, though the softness in commodity prices is aiding to the offer tone in the Aussie dollar along with the dovish slant from the RBA interest rate statement.
As addressed above, commodity prices are suffering this morning, with further froth being culled from the hydrocarbon market. The mixed signals from Russia last week in regards to potential cooperation with OPEC were further muddied during the overnight session, with Moscow’s Energy Ministry showing that Russia produced 10.88mln barrels per day of oil in January, a post-Soviet high. The global glut of oil doesn’t appear to be abating any time soon unless an agreement can be forged between OPEC and non-OPEC producers, but as outlined previously, the payoff scenarios from a collusion game theory situation doesn’t suggest a near-term agreement is likely. Subsequently, front month WTI is sinking back towards the mid-$30 level, and has pulled the CAD back from its overnight highs. From a technical perspective there is likely further room for momentum to carry the CAD higher in the short-term, however just like the weakness in CAD became overly stretched in mid-January ahead of the Bank of Canada rate statement, the subsequent rally in the CAD is now also appearing to exhibit stretched characteristics, and vulnerable for fresh shorts to begin reloading their positions.
There is little in the way of tier one economic data to grace the North American session, though the calendar does begin to heat up into the latter part of the week. The employment situation in the US is always a highly anticipated release, but holds more significance this week as a result of the recent softer than expected economic data weighing on domestic interest rate projections. After the first estimate of annualized GDP in the fourth quarter of 2015 was a measly 0.7%, and the Atlanta Fed’s GDP model tracking at just 1.2% for the first quarter of 2016, market participants have swung the pendulum of interest rate expectations for 2016 almost as dovish as possible, with the market not even fully discounting one additional rate hike over the course of the year (versus the FOMC dot plots where median expectations are for four rate hikes.) Though the estimates for new jobs added over the month of January are well below the monstrous 292k that were created in December, an upside surprise to the current expectations of 192k new jobs could give the interest rate market a shot in the arm, along with supporting the American buck.
Further reading:
Share
