GO Markets FX Analysis | CAD takes a hit; AUD edging higher ahead of China PMI

U.S equity markets edged higher with the corporate earnings flow continuing to top estimates. Nonetheless, stocks failed to move materially higher with most equity analyst’s suggesting the recent run-up across stocks may be dulling the impact of stronger earnings.

US congress ‘kicked the can’ a little further overnight, passing a bill allowing for the temporary suspension of the debt ceiling until May 19. Still, the debate between republicans and Obama’s democrats rages on, with March 1 the key date which triggers automatic spending cuts before government funding dries up on March 27.

Sterling

After falling to near 5-month lows earlier Wednesday, sterling appears to have stabilised above $US1.58-figure overnight as Prime Minister David Cameron promised to put a referendum on whether Briton should remain in the European Union if re-elected in 2015. We’ve seen a build-up of sterling short plays in the lead up, exacerbated by a series of less than inspiring data points, so it would seem markets were well prepared for this outcome.

CAD

Currency moves were reasonably shallow, with little in the way of top-tier event risk to encourage deeper moves. The Canadian dollar was an exception to the rule, taking a hit across the board after the Bank of Canada lowered its growth forecasts and signaled little urgency in raising rates. The ensuing period saw the greenback hit parity against the CAD for the first time since mid November.

While keeping the official cash rate steady at 1-percent as widely anticipated, the bank lowered its 2013 growth forecast to 2-percent, from 2.3 percent in October 2012. Although the bank maintained withdrawal of stimulus will be required over time, the statement noted “the timing of any such withdrawal is less imminent than previously anticipated.”

Yen

After look decidedly vulnerable around 88-figure, the USDJPY pair consolidated higher overnight with price action buoyant around current levels of Y88.6. While the performance of the Yen after Tuesday’s policy decision would suggest markets were left largely uninspired by the BOJ’s efforts, there remains little impetus to carry the Yen significantly higher.

As widely anticipated, the Bank of Japan on Tuesday adopted the 2-percent inflation target vigorously petitioned by Prime Minister Shinzo Abe over the last 3-months. In an effort to adhere to this target, the Bank of Japan agreed to launch an “open-ended” stimulus offensive to the tune of 13 trillion Yen per month. Nonetheless, with the program not due to commence until January of 2014, ensuing yen strength reflects a market – to a degree – uninspired by the Banks efforts. Still, the ‘buy rumor, sell fact’ scenario may only be short-term noise, with forward looking markets no doubt looking to price in the banks 2014 endeavors. For some, a short-term reprieve in Yen selling represents value before the Yen next leg lower is seen.

It’s also worth considering the possibility of the BOJ’s latest stimulus efforts being tweaked after the current Governor Masaaki Shirakawa’s term expires in April. We’re expecting to see a pro-stimulus ally of the Abe government installed, suggesting the banks latest effort may be just a taste of things to come.

Australian dollar

After a period of mild weakness following yesterday’s inflation data, the Aussie dollar has stabilised neatly between in recent range between 105.25 and 105.8 US cents.

Headline inflation grew 0.2 percent in the fourth-quarter last year to represent annual growth of 2.2 percent from a previous 2-percent. Economists had anticipated slightly higher growth of 2.4 percent. The closely watched trimmed mean and weighted median gauge of core inflation also printed slightly below estimates, averaging 0.55 percent growth on quarter and 2.3 percent in annual terms.

While it’s apparent the Reserve Bank may have the necessary “scope” to ease policy further when the bank reconvenes in February, we’re likely to see Stevens and Co hold fire. With interest rates already at record lows, it’s clear the bank will need to evaluate closely the impact of last year’s policy easing initiatives. As of yesterday, interbank cash rate futures imply a 39 percent chance the Reserve Bank slice another 25bps from the cash rate in February, slightly higher than the 34-percent noted on Tuesday.

Chinese Manufacturing data in frame

From here we anticipate the HSBC China manufacturing PMI release to hold sway over near-term moves for the local unit. Manufacturing in the region probably edged higher in January, with consensus estimates show a rise to 51.7 from 51.5 in December. We may need to see a deviation from the estimates one way or another to encourage a sustained break of 105.25 on the downside, or 105.8 on the upside.

At the time of writing the Australian dollar is buying 105.5 US cents.

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