Aussie tanks after RBA’s Lowe hints at rate cut possibility

Summary:

• Australian dollar bruised following a sudden change in rhetoric of the RBA’s governor

• Secret talks regarding delaying Brexit held by UK cabinet ministers

• Donald Trump delivered his 80 minute State of the Union

RBA’s Lowe flip flops

Yesterday when the Aussie cheered following the RBA’s rate decision (on hold) we wrote that this move looked suspicious and it was likely to fade in the nearest future. Over the course of European and then US session AUD’s appeal was gradually vanishing but a real breakthrough came during Asian hours trading. While the RBA has been holding a wording in its statement that the next move could be either up or down (the same was seen on Tuesday), Australian central bank chief Philip Lowe changed his mind to a more neutral stance stressing increased economic risks at home and abroad and sending the Aussie much lower. During his speech in Sydney he said that “Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.” Furthermore, Lowe more explicitly tied a possible decision on rates to the labour market shape underlining that it will be the key factor. To put it simply, if Australians are able to find jobs and wage growth accelerates, it could be a signal to the RBA to hike rates, however, if the economy softens and unemployment rises as a consequence, then it could be a warning signal to the Australian central bank. Let us remind that there are some reasons persuading the RBA to stay on hold, weak household spending, slumping house prices, persistent weak inflation and high indebtedness of households are among them. The Aussie is falling almost 1.3% this morning being decisively the weakest on the G10 heatmap. After the speech delivered by Philip Lowe the market-based probability of a rate cut by the year end jumped to almost 50%.

Technically 0.71 could be the level where AUD bulls may look for some support. This line coincides with the 38.2% retracement of the latest rally. Note that in the longer-term the pair might be more driven by the US dollar itself and the outlook for the US economy. Source: xStation5

Trump and Brexit

US President Donald Trump gave his 80 minute State of the Union where he referred to many threads. First of all, he said that he is “making clear to China that after years of targeting our industries, and stealing our intellectual property, the theft of American jobs and wealth had come to an end.” He also added that “I don’t blame China for taking advantage of us - I blame our leaders and representatives for allowing this travesty to happen.” In terms of trade negotiations he said that a new trade deal with China must include an end of unfair trade practices, reduce a chronic trade deficit, and protect American jobs. Trump also outlined his case for a wall at the border with Mexico when referring to an immigration crisis. One may conclude that his appearance gave no more clearance in terms of a possible deal on wall funding to avoid another government shutdown. Finally Trump announced that he would meet with North Korea’s Kim Jong Un in Vietnam on February 27-28.

In turn, according to the Telegraph newspaper UK cabinet members have secretly held talks on plans to delay Breit by eight weeks. If this idea was approved by the EU, it would postpone Brexit to May 24. The report said that ministers are hoping the EU will agree to a two-month “grace period” after March 29 if PM Theresa May’s deal passes through parliament to provide the additional time for necessary legislation. Now Theresa May is travelling to Brussels when she has a scheduled meeting with EU leaders on Thursday. She’s main goal is to obtain an agreement from the EU to changes to the Irish border arrangements, something the EU is clearly unwilling to approve.

The EURGBP is cracking its resistance in form of the orange trend line. This line played an important role in the past, hence one may expect the same this time around. Source: xStation5

In the other news:

• API reported that US crude inventories rose 2.51 million barrels in the last week, gasoline inventories increased 1.7 million barrels

• US indices finished the yesterday’s session with decent gains, NASDAQ (US100) gained 0.7%, Dow Jones (US30) rose 0.7% and the SP500 (US500) jumped 0.5%

• Asian stock market little changed, the US 10Y yield trades at 2.691% this morning