The war against global deflationary pressures rages on, with the Reserve Bank of Australia becoming the fifteenth central bank in 2015 to ease monetary policy, cutting their cash rate by 25 basis points to 2.25%. Much like the Bank of Canada, the RBA noted the sharp decline in commodity prices would offer support for consumer spending, but the declining terms of trade would reduce income growth and provide short-term headwinds the economy will need to overcome. While the Australian central bank did make note the domestic currency has declined noticeably against the greenback, it still remains above estimates of fundamental value when compared to a basket of currencies, and thus a further downward adjustment is required for balanced growth in the economy. Though the majority of economists had expected the RBA to hold rates steady at today’s meeting, market participants had been steadily increasing their bearish positioning on the aussie heading into the announcement, with the follow-through after today’s rate cut pulling the rug out from under the Antipodean currency with AUDUSD dropping to lows not seen since early 2009. The aussie has managed to find some support against the greenback in the high-0.76s, though like the other commodity-bloc currencies, there is likely further downward adjustment to come as the RBA tries to battle global deflationary winds, while at the same time trying to keep the potential emergence of a housing bubble under close supervision.
Heading over to Europe, the major bourses are well situated in the green as we head to print, bolstered by optimistic reports the Greek debt negotiations are progressing in an orderly fashion. Though still a ways away from an agreement being reached, reports have surfaced that the Greek finance minister is no longer calling for a headline write-off of Greek debt, but instead requesting a variety of debt swaps in order to ease Greece’s financing burden. On the menu of debt swaps would be securities that are linked to nominal GDP growth aimed at reducing debt servicing costs in times of economic hardship, with these new bonds replacing the issues already in place under the European rescue plan. The challenge will be how the rating agencies view a debt swap plan and whether this would be considered a distressed debt exchange and effectively a default event, as the opposition from the EU around a Greek debt restructuring has surrounded the impairment of securities held on the ECB’s balance sheet, and thus anything impairing debt held by the ECB seems to be a non-starter at this point. In addition, the Greek finance minister is doing his best job at appeasing both sides of the aisle, trying to engineer a swap that shrouds what is really a debt haircut to win the German’s over, while at the same time rebutting arguments from the Greek media that his stance is backing down from Syriza’s anti-austerity plan to reduce Greece’s debt burden. The euro has so far responded favourably to the progression in negotiations, with EURUSD flirting with a 1.14 handle as we head into the North American cross.
As we get set for the opening bell in North America, there is little in the way of tier-one economic data for markets to feed off of. S&P futures have begun to roll over and cede their earlier gains as comments from Merkel about Greek debt negotiations dragging on for months weighs down risk sentiment, while oil sees a continuation of bounce that has propped the front-month WTI contract above $50. The loonie has experienced heightened volatility throughout the overnight session, taking another leg lower after the RBA rate cut, only to swing the opposite direction as energy price action lends support for the commodity-linked currency, and holds USDCAD in place from yesterday’s close. Leading indicators of inflationary pressure in the Canadian economy over the month of December were just released, with mixed results as prices for raw materials dropped by less than forecast, while the industrial product price index slid by more than economists estimated. Even though raw material prices fell by less than forecast, the drop of 7.6% was the largest m/o/m drop since early 2009, and marks the six consecutive monthly decline, illustrating the case for disinflationary concerns within the Canadian economy is growing.
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