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RBA is on hold, Dudley: rate-hike timing data dependent

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In the Asian session, the majority of equity indexes extended gains overnight. The Hang Seng and the Shanghai Composite were higher by 0.77% and 1.77% respectively, while the Nikkei was up by 0.87% to 19,667 and is grinding towards its all-time high of 19,778. USDJPY has shown little volatility in Asia and is treading water in its 115.65-122.18 range. The bias remains on the downside as the resistance of its declining channel stands at 119.60/90.

As suspected (see Weekly Market Report) the RBA decided this morning to remain on hold and maintain its official cash unchanged at 2.25%. The Reserve Bank said that further easing may be appropriated in period ahead and added that actual inflation is currently consistent with target. However, the overall dovish tone has keep the door open for further easing. Unsurprisingly AUDUSD appreciated sharply from 0.76 to 0.77, the pair is now consolidating slightly below this level. We still anticipate the RBA will cut rate next month as the AUD is broadly seen as overvalued. Moreover a helping hand from the RBA would be welcomed by the Aussie economy that is still suffering from desperately low commodity prices.

Yesterday, the greenback edged up after recent weakness due to unexpectedly weak job data. The 126k outcome for US March nonfarm payrolls was significantly weaker than expected (245k forecasted). On Friday, as a result, the S&P 500 depreciated sharply below 2050 before returning, the following day, to its initial level amid Fed member Dudley’s dovish statement. NY Fed’s President reiterated that the timing of rate normalization would be data dependent and that he viewed these recent downside surprises as reflecting temporary factors to a significant degree. EURUSD is again close to its 1.1040/50 resistance level. The next key support stands at 1.0912 (Fib 76.4% on March USD selloff), if broken another support lies at 1.0825 (Fib 50%). We still see the broad target set to parity; traders should find actual levels attractive to strengthen their short-EUR/USD positioning as euro failed repeatedly to break the 1.1040/50 area. In Europe, Greece declared that it will not miss the €450mn payment to the IMF due on April 9. Most EUR-cross were up on the news, easing fears that Greece would not default on its debt.

Peter Rosenstreich – Head of Market Strategy: “There looks to be little this week that will reverse the recent USD bearishness following the disappointing NFP read (don’t expected any help from fed speakers). Investors are now reexamining past soft data for indications of a US slowdown rather than merely a soft patch. Q4 2014 US data saw robust acceleration so it’s normally due, to cyclical nature of economic data, to see a soft patch. As weakness from Q1 filters in to the US data there will be increasing calls for no hike in 2015 generating a deeper correction in USD. We see this week as the continuation of this early trend. EM and high yielding currencies verse the USD remains the best short-term play. However, we anticipate that the US economy will pick back up at the beginning of the summer and the September timing of the first rate hike, so don’t dig in too deep (plus weak data and Greek risk could deter resilient risk seeking)”.

Luc Luyet, CIIA – Senior Market Analyst: “The weak nonfarm payrolls on Friday confirm that a rate hike in June is unlikely. However, it does not change our scenario of a September rate hike. Indeed, the unemployment rate held at 5.5% and earning wages slightly increased, while transitory effects like the bad weather have likely significantly weighed on the poor payroll gains.”

In Lausanne, talks about Iran nuclear program were productive as the so-called P5+1 and Iran surprised markets on Thursday by delivering a preliminary agreement. However, it is not quite the end of the road for Iran as the full details of the final deal will not be finalized until the end of June. WTI crude oil is up almost 4% to since last Friday to $51.64 while Brent appreciated roughly 4.3% on the news to $57.42 a barrel.

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