Big moves in AUD and GBP

Put the two fundamental events that have unfolded in the UK and Australia over the last 24 hours together and you end up with a fairly sizeable move higher in GBP/AUD.

In terms of central bank action, it’s a given that the RBNZ will be the first developed central bank to hike (in March), however it seems that it will be the Bank of England which will be the second major central bank to raise interest rates - probably in Q1 - with the RBA and the Fed sometime after.

Sterling against other G10 currencies has seen good two-way business from clients today. The sizeable move higher in the money markets yesterday highlighted what the market thought of Mark Carney’s - and the BoE’s - new guidance, with short sterling futures (June 2015) moving up 16 basis points and now pricing in a cash rate of 1.2% by mid-2015.

This seems a little optimistic to me, but the fact that the bank have moved away from focusing firmly on the employment rate to focus more on the slack in the UK economy - and the various inputs that feed into their view around their measures on spare capacity - has been a trigger for many to bring forward their view on BoE tightening to Q1 2015.

Australian jobs report a horror

In Australia today we’ve seen what can only be described as a horrible January employment report. Traders (myself included) have warmed to the AUD of late and the trend against both the greenback and crosses has been higher. The question is; how much of an influence this poor employment print will be, considering it is a lagging indicator? Judging by the 100 pips fall in the AUD/USD and six basis point fall in Aussie 10-year yield, some are suggesting the RBA should cut rates.

Personally I feel the RBA won’t be too swayed by this report, especially given the lag effect and a number of leading indicators (such as the employment sub-component in the business survey) suggests better times ahead. The key for future cuts now falls on the looming private capex figures and future inflation reads, however my view is that rates are on hold for some time to come.

To be honest, the debate around the future of Australian monetary policy is all over the place; one minute you hear everyone talking about rate hikes, the next a cut. Listening to the RBA seems logical right now, and when they call for a period of interest rate stability, traders should listen.

In terms of Asian equities, it’s flat days in Australia, while slight weakness is seen in Hong Kong, Japan and China. Looking at the ASX 200, the market wasn’t overly affected by the weak jobs report and the moves seemed contained to the bond and FX market.

Earnings have been seen from names like ASX, TCL, TLS, PDN, GMG, CHC, GPT and traders are watching intently for full-year earnings from Rio Tinto after the bell. Last year the stock fell 3% on the following day after reporting full-year earnings, however it was trading on a P/E some 15% above its current P/E, so it will be interesting to see how the market deals with the earnings (consensus calling for NPAT of $9.65 billion) and narrative around costs and any special capital management initiatives.

S&P losing momentum

US futures have barely moved since the close of the cash market and clients have been quite subdued on our out-of-hours European markets, with no real volatility in Asia to influence. The momentum in the S&P 500 seems to be waning around the 76.4% retracement of the January sell-off at 1824 and a break of this level is clearly needed.

On a bullish note, the MACD crossed the signal line on February 9, highlighting short-term momentum is higher and we have to go back a number of years for the last failed buy signal from this indictor.

In terms of data we get US retail sales and jobless claims, while in Europe German CPI will take centre stage, although no changes are expected. Janet Yellen was due to speak again, this time to the Senate Banking Committee in Washington, but this has been postponed due to poor weather.

In terms of stocks there is new discussion about Comcast agreeing to a deal with Time Warner for $159 a share which, if it goes ahead, would create a company with a top 40 revenue stream in the S&P 500. Traders will also look out for numbers from Lloyds, BNP Paribas, ENI and Commerzbank.

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