The most pronounced moves across currencies overnight came from the Euro, with a series of negative themes halting and reversing its recent ascent. Spanish Prime Minister Mariano Rajoy is back the spotlight over a corruption scandal with documents published by the media showing illegal funds channeled to Rajoy and his party members.
In a press conference with German Chancellor Angela Merkel, Rajoy denied any wrong. The bad news continued to role in from Spain overnight, with the latest employment data showing 26-percent of the population is now unemployed.
The political landscape in Spain is a stark reminder of the sort of tail risk which threatens to drag the Euro region back to the depths of despair. Sentix Investor confidence also highlighted the vulnerabilities in the region with the index falling -3.9 in February, although a strong improvement from the previous reading of -7.
Adding fuel to the political fire is further dismay in Italy, with Bank Monte dei Paschi di Siena under scrutiny surround derivative deals which were apparently designed to hide losses, instead created a deeper hole. The bank apparently has links to the Democratic Party, led by Pier Luigi Bersani, who are currently in the lead ahead of this month's election.
Despite renewed dismay in the region, it's apparent the Euro's unwavering ascent in recent weeks called for a natural period of consolidation. Overnight Euro suffered its deepest losses against the Yen with the pair falling from the lofty 34-month highs seen early yesterday to lows of 124.65. Similarly the EUR-USD pair has fallen from circa $US1.37 and is currently on the cusp of testing short-term support at 1.35-figure.
U.S markets also failed to revive enthusiasm, with equity markets kicking of the week in decidedly poor form following on from solid losses from European markets. At the time of writing the S&P has pared much of Friday's gains with the index down near to 1-percent on the day.
In economic news, Factory orders rose 1.8 percent in December, less than the 2.2 percent consensus estimates. Keeping with the recent cyclical peak from U.S data, we can consider this a significant improvement from the previous reading of -0.3 percent.
A$ finds support ahead of RBA
The Aussie dollars fortunes were stable overnight despite the negative leads from both sides of the Atlantic. Solid losses across US equities failed to derail the local unit with supportive behavior noted above 104 US cents ahead of today's much anticipated Reserve Bank Policy decision. Surprisingly weak building approvals data only temporarily weakened the Aussie yesterday with demand just above 104 containing moderate selling.
Although economists widely expect no change to the official cash rate today, the local data flow since the December meeting has - to a degree - reinforced the case for Stevens and the board to lean towards further policy easing this year.
Although today's statement may acknowledge improvements in the global economy - particularly that of the Euro region and United States - the domestic data pulse remains stable but far from encouraging. While we anticipate this sentiment to be expressed in the statement, the chances of the board taking immediate action and taking the cash rate deeper into accommodative territory appear slim. They have in the past expressed a need to wait until previous cash rate concessions to penetrate the broader economy, and we are likely to see this point reiterated.
December's meeting minutes showed the decision to cut was carefully considered, with the board questioning whether to respond immediately or wait for further information. This suggests December's rate cut was - in part - a preemptive strike, and while most would agree the move was appropriate, it diminishes the chance of a follow up rate cut. Stability from both sides of the Atlantic, stronger Chinese data and stronger commodity prices also support the case for the RBA to hold on Tuesday. Still, pundits and punters will no doubt scour the statement for any clues on where the bank see's the balance of risks in 2013 and Aussie will be the first to react.
Interbank cash rate futures imply a 17-percent chance of a 25 bps rate cut today, down from 22 percent on Friday.
At the time of writing the Aussie dollar is buying 104.3 US cents.