Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Asia is positive in a fairly quiet session, with Japan closed in observance of Greenery Day, while South Korea also has a holiday. There has been a bit of activity in Australia today with the market focusing on the trade balance and RBA rate decision releases. Local trade balance figures showed a 0.73 billion surplus, while the market was expecting a surplus of $1 billion. The disappointment was mainly a result of a 2% drop in exports, which was blamed on a slowdown in commodity revenue. This would have been mainly a result of the recent slide in iron ore prices. However, February was revised up and this was somewhat of a consolation.
What this confirmed though was the fact that the local economy still has a while to go before producing a sustainable recovery. AUD/USD barely flinched on the trade balance figures as traders remained indecisive heading into the RBA rate decision. The pair was sidelined at 0.928 heading into the RBA announcement.
RBA remains on hold
As expected, the RBA kept rates on hold and reinforced its neutral stance. The statement was quite interesting as always, though and the RBA acknowledged the recent CPI disappointment. A couple of issues that stood out in the language were around the fairly elevated AUD and the recent benign inflation reading. While inflation disappointed, it is still well within the RBA’s target.
The global backdrop also remains a concern particularly with China continuing to churn out some mixed economic readings. The price action in the AUD was quite interesting as it initially spiked to 0.9317 before a sharp pullback not long after that. This shows traders were perhaps positioned for a much more dovish statement and therefore covering caused the initial move.
Some traders would have been hoping last week’s disappointing CPI reading would push the RBA to suggest if the trend continues then possibly we could see another cut. However, it is clear the central bank is happy to remain neutral. AUD/USD has since dropped back below 0.93 and we could see it stuck in its recent tight range yet again, or even perhaps see further downside. There is also an uptrend support line which comes in at around 0.928 on the daily chart and we really need to see the pair close above this level to keep the pair in its short-term uptrend – failure of which could see the pair head back to test the 0.92 region.
Europe pointing higher
Looking ahead to European trade, we are calling the major bourses modestly firmer. There will be some focus on UBS’ first quarter report which showed profit came in ahead of estimates. While the single currency has been in a tight range, it remains the most interesting currency to watch this week with some significant releases on the way.
Today we receive non-manufacturing PMIs for April covering the region and some of the major economies. It is important to remember that a lot of European nations are more services-orientated as opposed to manufacturing. However, this data will be a mere curtain raiser to the ECB’s policy decision come Thursday. No change in policy is expected but some analysts remain hopeful that further stimulus will be announced.
The recent CPI print went a long way towards removing hopes of imminent stimulus, but we still need to hear commentary from ECB President Mario Draghi confirming this. Additionally, if stimulus is on the table, perhaps Draghi merely fleshing out how the ECB would go about it would be enough to please euro bears and spark a reversal lower in the single currency. As it stands, EUR/USD is knocking on 1.39, a break of which could see it test March highs. On the USD side of the equation we have trade balance later today, which should be interesting after last week’s benign GDP reading.