From Marc to Market:
The US dollar's downtrend is extending. The euro traded above $1.16 for the first time since last August. With Japanese markets closed for the second half of the Golden Week holidays, perhaps participants felt less hampered by the risk of intervention and pushed the dollar to almost JPY105.50. Despite an unexpectedly large fall in the UK's manufacturing PMI (49.2 from 50.7), sterling has pushed to its highest level in four months (~$1.4770).
The Australian dollar is the main exception. It is off about 1% following the 25 bp rate cut that brought the cash rate to a new record low of 1.75%. Given the OIS and indications from other derivative markets, the market seemed set for a symmetrical response. Even the surveys showed a nearly evenly divided outlook. Twelve of 27 in a Bloomberg expected a rate cut.
We had not be persuaded that last week's soft Q1 CPI was sufficient to put the RBA over the edge. However, in explaining the decision, Governor Stevens recognized that while inflation had been low for some time, it was exceptionally low now (CPI actually fell in Q1), and the outlook had diminished. He also noted the "very subdued" growth in labor costs.
Before the RBA's announcement, the Australian dollar had climbed to $0.7720. Recall it finished last week near $0.7600. However, after the cut, the Australian dollar fell a little below $0.7560. The government forecast a little more than an A$37 bln deficit that was in line with expectations and set the stage for a national election in early July. This consideration may have also pushed the RBA into action today. If the election is called, as widely expected, the June 7 RBA meeting and the July 5 RBA meeting may be too close.
*The idea is not mine to claim.Investors have been well aware the UK economy has lost some momentum. This understanding was confirmed by last week's estimate of Q1 GDP (0.4%). Nonetheless, today's manufacturing PMI was a surprise. It fell below the 50 boom/bust level at 49.2, and the March series was revised lower (50.7 vs. 51.0). Export orders were weak, and costs and output prices fell. The construction and, more importantly, the service PMI will be released in the coming days. Both are expected to generate a consistent signal that after slowing in Q1, the UK economy is slowing further at the start of Q2.....MORE
In an April 28 FT Alphaville post I've been meaning to link to for other reason's, Izabella Kaminska quotes the Chair of the Jerome Levy Forecasting Center:
...Purportedly, the additional strengthening of the dollar in late 2015 and early 2016 — on top of the strong rising trend of hte previous 15 months — was the primary cause of the January-February global sell-off. Moreover, it is claimed, a set of central bank policy changes following the February G20 meeting in Shanghai sent the dollar back down, revitalising financial markets around the world....He's dismissing the idea but it sure does seem as if something changed in February.
