Euro Falls on Rates Outlook; AUD looks to China for inspiration

Euro falls on rates outlook

U.S markets weighed up a mixed bag of economic reports with encouraging weekly jobless claims offsetting a weaker than expected revision of fourth quarter growth, while concerns surrounding budget cuts encouraged only moderate weakness late in the session.

U.S jobless claims fell to 344,000 for the week ending February 24, down from 366,000 the week before. The second revision on fourth-quarter GDP failed to meet expectations with growth revised up 0.1 percent, well short of the 0.5 percent growth expected.

After peaking at 1.3162 late yesterday, the Euro resumed its downward trajectory with Italian politics remaining an underlying point of contention. A weaker than anticipated core inflation print triggered further losses with price action now tentatively supported above $US130.50.  While headline consumer prices remained steady at 2-percent, underlying inflation fell to 1.3 percent in January from a previous and expected 1.5 percent. Although the data may not be enough to materially change interest rate expectations, it at the very least supports the case for further near-term easing from the European Central Bank. Comments by ECB President Mario Draghi overnight also suggest the bank is by no means looking for the exits as far as stimulus is concerned.

While the Euro remains vulnerable to further downside, European stocks were driven higher overnight as central banks from both sides of the Atlantic easy policy is here to stay for the foreseeable future. In his two-day testimony this week, Fed Chairman Bernanke gave  no indication the Fed will begin to unwind asset purchases, and markets have suitably re-calibrated expectations the Fed's life-line will be unwound through the latter half of 2013. In short, the status quo of easy money has been maintained. The Euro STOXX index closed 0.83 percent higher on the day.

Japanese Yen eases on risk trends/BOJ nomination

Yen crosses resumed a slow crawl higher in response to slightly more favourable risk trends and the confirmation of the government's nomination for the Bank of Japan top job. As widely anticipated, Japanese Prime Minister Shinzo Abe formally nominated Asian Development Bank President Haruhiko Kuroda as Bank of Japan governor. Abe also threw into the mix Kikuo Iwata and Hiroshi Nakaso as deputy governors. Markets will now focus on developments in parliament, with Abe's nominations needed to be approved by both chambers before Kuroda, Iwata and Nakaso can be formally appointment. All are seen in some form as pro-stimulus allies of the government and expected to hit the ground running once taking the reins. At the time of writing the US dollar is buying 92.5 Yen, up from early week lows of 90.89 Yen.

Australian dollar awaits Chinese PMI

A swift drop in the ensuing period of yesterday's CAPEX data was met with a flurry of buying activity with the investment intentions component of the index showing mining investment will remain a pillar of support for the economy through 2013/14. Still, residual weakness from the Euro and a late pull back from U.S equities have capped gains overnight and the time of writing the Australian dollar is under moderate pressure at 102.15 US cents.

We anticipated the official Chinese manufacturing PMI release at midday will be a key determinate for the Aussie dollar, followed by the HSBC equivalent at 12.45pm. There does appear a reluctance to carry the local unit deeper into the 101 figure, with respective lows of 101.82 and 101.97 seen through the week. We also note solid demand around 101.5 which should contain another corrective move lower should today's manufacturing gauges come in short of expectations, but remain in expansion territory.