Australian dollar lifts against the Greenback as cuts loom

Share Markets:

Investor sentiment lifted on news Eurozone economic growth was stronger than consensus expectations in Q4.

Greek bailout negotiation optimism also boosted risk appetites. The Dow rose 0.3%, the S&P 500 gained 0.4% and the Nasdaq was up 0.8% for the session.

In Europe, the Eurostoxx 50 gained 0.9%, while the Greek stockmarket was up 5.6%.

Interest Rates: 

US bond yields rose, particularly at the long end, with yields on the 10-year government bonds up 7 basis points to 2.05%.

Optimism on Greek debt negotiations and stronger GDP growth in Germany reduced demand for safe haven government bonds.

German bond yields also rose, with the 10-year yield up 2 basis points to 0.34%.

Foreign Exchange:

The Australian dollar strengthened against the US dollar, with AUD/USD rising to currently trade around 0.7777.

The Euro gained ground against the US and Aussie dollars, finding support in the stronger than expected Eurozone GDP numbers.

Sterling strengthened against the US dollar after the Bank of England said UK inflation will be above its 2 per cent goal by 2018 and raised its growth outlook for 2016 and 2017.

Commodities:

The oil price rose on expectations a decline in US drilling will reduce the oversupply of oil.

Australia:

There was little forward guidance on interest rates in the Governor's testimony on Friday and plenty to either argue the case for more cuts or to leave the cash rate on hold for a time.

We think the RBA will cut rates again in May, but could not rule out an earlier move.

Stevens further explained the decision to cut rates last week, which largely rested on the forecast for growth to remain below trend for longer.

In particular, non-mining business investment was weaker than the RBA expected six months ago. However, Stevens noted that actual conditions had not weakened significantly.

There remains confidence that conditions remained in place for a further pick up in non-mining investment, just later than previously expected.

The RBA reiterated that financing remains readily available.

The Governor admitted that monetary policy was less effective in boosting demand than in the past.

Europe:

Eurozone GDP rose by 0.3% in the December quarter, compared to consensus expectations for a 0.2% increase. For the year to Q4, Eurozone GDP rose 0.9%.

German GDP rose by a larger than expected 0.7% in Q4. Greek economic growth fell 0.2% and growth in Italy stagnated.

United Kingdom:

Construction output rose 0.4% in December. For the year to December, construction output is up 5.5%, down slightly from 5.8% in the year to November.

United States:

The University of Michigan measure of consumer sentiment fell to 93.6 in February, from an 11-year high of 98.1 in January, indicating that despite the decline, consumer sentiment remains solid.

Gasoline prices started to lift from a six-year low in February, moderating US consumer confidence.

Retail sales fell 0.8% in January, after declining 0.9% in December. Much of this decline reflected falling gasoline prices, with retail sales excluding autos and gas rose 0.2% in January.

Import prices fell 2.8% in January, as the stronger US dollar and the fall in oil prices impacted import prices. For the year to January, import prices are down 8.0%, from a decline of 5.0% in the year to December.



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