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RBA throws a curve ball

Published February 7, 2019

by Nicholas Cork

So much for forward guidance as in a reverse of stance from Tuesday’s accompanying statement, the RBA signalled yesterday interest rates could move in either direction but dependant on the strength of the labour market and inflation. This had a sharp impact on the AUD, falling quickly towards 0.7150 before easing lower towards 71 cents overnight. The fall was the biggest one day drop since the ‘flash crash’, however no quick bounce in sight this time as trading positions continue to be adjusted. The factors the RBA mentioned, unemployment and inflation, both do not warrant forcing their hand at this time, however the mere mention of the possibility is enough to change market sentiment in the short term. Both NZD and CAD were also dragged lower, and AUD crosses are all much lower to start today. With the lack of hard news on trade talk progress, traders are beginning to focus on the March 2 deadline for further tariff increases which will continue to weigh until new news.

The USD has had another day of broad gains after surviving a relatively benign State of the Union, supported again by better data which showed the U.S. trade deficit fell in November for the first time in six months. The trade deficit dropped 11.5 percent to $49.3 billion in November after increasing for the previous five months. Notably the goods trade deficit with China fell sharply to $37.9 billion in November from $43.1 billion in October. Economists are now revising higher their 4th Qtr US GDP forecasts.

Brexit appears to be not traveling that well as it descends into insults such as EU Council president Donald Tusk lambasting the UK authorities over their attempts to change the withdrawal agreement, saying “I have been wondering what the special place in hell looks like for those who promoted Brexit without even a sketch of a plan to deliver it safely.” This was closely followed by European Commission boss Jean-Claude Juncker saying his job in Brussels was “hell.”

AUD breaks down technically  (Reuters)