Australian Central Bank Signals No Change in Stance

Daily Analysis - 21/02/2017

RBA Meeting Minutes Indicate Rates to Remain Low

While the Reserve Bank of Australia was broadly positive in how it outlined the outlook for the economy, there remain some tangible concerns surrounding the outlook, specifically related to weaker household consumption and exchange rate dynamics.

RBA Plans to Keep Rates Lower for Longer

Although significant progress was made on the economic activity front during the fourth quarter following the third quarter GDP contraction, policymakers at the Reserve Bank of Australia intend to leave low interest rates in place for some time. The weakening Australian dollar was cited as a positive development for the economy, especially amid the uptick in resource exports and the greater traction for inflation which remains “well anchored” according to the Monetary Policy Committee.

However, there are some soft spots in the economy, mainly attributed to weaker investment in the mining and minerals sectors while consumer spending remains subdued in light of weak income growth. On balance the minutes were optimistic, however, risks to the outlook remain, especially if the local currency appreciates. The Australian dollar fell after the announcement, with AUDUSD edging lower overnight.

French Manufacturing Expansion Decelerates

In a worrisome sign in the run up to the election, preliminary manufacturing PMI figures reported earlier showed that growth in sector is gradually ebbing. Advance data showed that French manufacturing activity dipped to 52.3 from the final 53.6 figure reported back in January. This latest downtick comes amid rising anxiety about the political environment and increasing sovereign bond yields which have not seen this level of turnover and volume since the sovereign debt crisis between 2010 and 2012.

After the fumble of conservative candidate Francois Fillon, Marine Le Pen’s National Front party has stormed into the lead and is currently the favorite to win the first round of voting. As a result, the yields investors require to hold French debt instead of comparable German debt has risen to the highest point since 2012. The CAC 40 is currently lower on the session, sliding for a fourth straight session.

Japanese Factory Growth Continues to Climb

Sharply contrasting with the previous session’s trade data, Japanese manufacturing activity for the month of February is showing sustained momentum higher in a sign that the economy is continuing to benefit from the sharp depreciation in the currency during the fourth quarter. According to preliminary figures published by Markit Economics, the flash purchasing managers’ index climbed to 53.5 during the month of February. This compares with the 52.7 recorded back in January with February’s advance data marking the highest manufacturing expansion reading in 35-months.

Drivers of this momentum included a major uptick in new orders for export along with the first backlogs in 14-months, evidence of the pickup in business. This was further reflected by the business confidence component rising to a record high. After rising modestly on Monday, USDJPY is extending gains in early Tuesday trade.

Russian Industrial Output Rebounds

Following more tepid results back in December, Russian industrial activity managed to display annualized growth of 2.30% through the end of January. Bolstering the results were stronger trends in manufacturing and mining. However, besides printing below the consensus estimate for the period, industrial output fell by 23.80% during the period, underscoring the challenges that may lie ahead.

Nevertheless, from a sovereign rating perspective, Russia received a positive ratings revision last week from Moody’s which upgraded the outlook to stable from negative amid ongoing fiscal consolidation in the country. With inflation falling and growth on the rebound, there may be further upgrades which help the Russian economy strengthen further over the medium-term. After strengthening on Monday, the Ruble continues to gain ground versus the US dollar, with USDRUB gapping down slightly.