The Australian dollar overcame yesterday's post-jobs slump overnight, regaining composure alongside a solid performance from US equity markets.
Yesterday's jobs data supported the case for further easing from the Reserve Bank, in turn providing headwinds in the ensuing period. Nevertheless, the highs high-beta credentials saw its appeal increase alongside strength from U.S equities overnight, returning from lows just below 105 US cents to current levels around 105.5.
Interbank cash futures imply a 41 percent chance Stevens and Co will slice another 25bps from the cash rate in February, up from 37 percent on Wednesday.
The Australian economy lost 5,500 jobs in December against expectations of a moderate increase. As widely anticipated the official jobless rate rose to 5.4 percent, up from a negatively revised 5.3 percent in November.
While most economists agree the RBA will hold fire in February, many expect the bank will pursue further policy easing over the course of 2013 ranging from 50 - 100 bps worth of interest rate cuts. However, this doesn't necessarily imply the Aussie will follow interest rates lower, with still a relatively high yield keeping the Aussie's risk credentials firmly intact.
We consider the dollars more re-active qualities to US policy to remain a primary directive, implying a series of interest rate cuts over an extended period may only provide intermittent bouts of weakness. Instead, should the U.S data pulse continue to improve, a possible scenario is an unwinding of stimulus expectations will rejuvenate the greenbacks appeal, at the expense of high-beta currencies such as the Aussie dollar.
While it may take some time for this scenario to materialize, it's certainty worth pondering in the weeks and months ahead.
The day ahead will see the focus turn to China with fourth-quarter GDP on the docket. The perception on the street is China has avoided a hard-landing, and while today's data is in important directive we need to consider just how much 'good news' is already priced in.
This suggests the upside for China-contingent currencies such as the Aussie and Kiwi is limited should we fail to see any significant deviation to the upside of estimates. China's economy probably grew 2.2 percent in the fourth-quarter to represent 7.8 percent growth in annual terms from 7.4 percent in the third-quarter. Also in focus are data on industrial production, retail sales and fixed asset investment.
'Abe trade' back in vogue ahead of BoJ
Once again the Yen provided the entertainment for the evening, extending yesterday's losses across the board to post new milestone lows against its major counterparts.
The USDJPY pair is currently on the cusp of touching a fresh 2 ½ year lows of Y90 after a period of consolidation. Earlier this week the Yen appreciated across the board after Japan's Economy Minister Akira Amari warned of the potential negative repercussions of a fast falling currency.
Nevertheless, these concerns have been superseded after reports circulating yesterday the Bank of Japan will embark potentially unlimited asset purchases until a 2-percent inflation target is reached, while removing the 0.1 percent overnight cash rate it pays institutions to park funds at the bank.
In response we've seen all the usual suspects lead the charge higher against the Yen with the Euro leading the way which made a convincing break to the upside of Y120, representing fresh 20-month highs.
The next Bank of Japan policy meeting will be held over January 21-22.
US Markets: Jobless claims hit 5-year low
U.S markets responded in kind to positive data with a sharp increase in new housing starts and fall in the weekly jobless claims. The number of U.S citizen applying for unemployment benefits dropped to a 5-year low for the week ending Jan 12. Jobless claims fell to 335,000 outpacing expectations of around 370,000 new claims, which are seen as a particularly good pre-cursor to jobs growth.
Nevertheless, the data overnight wasn't all positive with the closely watched Philadelphia Fed manufacturing gauge pointing to a period of sub-par activity in January. The index fell to -5.8 in January, well short of the expecting reading of +6. Companies surveyed reported fewer new orders, while hiring remained modest according to the survey in what is believed to be a product of continued political drama surrounding the ham-handed fiscal cliff and subsequent debt ceiling negotiations.