Increasingly Cautious RBA Outlook Drives Australian Dollar Sell-off

Note of RBA Caution Weighs Heavily on Australian Dollar

Signs of increasing caution within the Reserve Bank of Australia’s (RBA) statement on monetary policy left the Australian Dollar under pressure. As the central bank opted to lower its economic forecasts this highlighted a sense of anxiety over the domestic outlook, particularly in the face of the Wuhan coronavirus outbreak. Even though the RBA showed reluctance to cut interest rates, thanks to high levels of household debt, AUD exchange rates weakened in the wake of the statement.

If the Chinese economy demonstrates greater evidence of resilience, though, this may encourage some renewed support for the Australian Dollar.

Rising UK House Prices Encourage Pound Rally

January’s Halifax house price index offered some encouragement to the Pound, showing a modest 0.4% monthly uptick. This improvement suggests that household confidence picked back up at the start of the year, in spite of the ongoing uncertainty surrounding the UK’s future relationship with the EU. While doubts over the resilience of the UK economy linger this was not enough to prevent GBP exchange rates recovering some of their lost ground.

However, in the absence of any fresh UK data tonight the mood towards the Pound could easily sour once again.

Euro Under Pressure as German Industrial Production Tanks

Confidence in the health of the German economy took a fresh blow as December’s industrial production data saw a -3.5% drop on the month. While export volumes showed a small uptick on the month this was not enough to give the Euro any cause for confidence. With the German trade surplus continuing to narrow and with economic momentum looking set to weaken further the single currency fell widely out of favour.

With forecasts pointing towards a decline in the Eurozone Sentix investor confidence index the mood towards the Euro looks unlikely to improve in the near term.

Strong Payrolls Report Boosts US Dollar Appeal

Demand for the US Dollar picked up further heading into the weekend thanks to a stronger-than-expected non-farm payrolls report. As payrolls increased 225,000 in January, bettering forecasts of a 160,000 uptick, USD exchange rates found a fresh rallying point. Although this was accompanied by a higher unemployment rate that failed to weigh on US Dollar sentiment, particularly in the face of market risk aversion.

As long as investors maintain a general sense of anxiousness in the near term the US Dollar could remain on a positive trend.

Canadian Dollar Stumbles in Spite of Lower Unemployment Rate

A surprise improvement in January’s unemployment rate helped to limit the downside potential of the Canadian Dollar during Friday’s European session. While unemployment fell from 5.6% to 5.5% at the start of the year this change was largely driven by a dip in the corresponding participation rate. As a result, signs still point towards weakness within the Canadian labour market, in spite of rising hourly wages.

Even so, a moderate month of growth in building permits may help the Canadian Dollar to return to a stronger footing overnight.

Business Inflation Expectations Uptick Fails to Lift New Zealand Dollar

Although the first quarter business inflation expectations index picked up modestly this was not enough to shore up the New Zealand Dollar ahead of the weekend. Investors remain wary of the potential for a slowdown in economic growth, limiting the appeal of the risk-sensitive New Zealand Dollar. With market sentiment leaning towards bearishness NZD exchange rates remained on the back foot.

Growing anticipation ahead of the Reserve Bank of New Zealand’s (RBNZ) February policy announcement looks set to limit the potential for New Zealand Dollar gains this week.

Data Releases

February 10th 19:30 EUR Eurozone Sentix Investor Confidence (FEB) 4.0
February 10th 23:15 CAD Building Permits (MoM) (DEC) 0.6%

Louisa Heath