RBA Joins Parade and Market Likes Greek Proposals

The Reserve Bank of Australia joined the chorus of central banks to ease policy.  The 25 bp rate cut was not a major surprise but it did catch many a bit off-guard as recent data and the pace of the Australian dollar's decline had prompted many to push out the expectation to next month. 

Although more details will be in the monetary policy review at the end of the week, but today's rate cut is unlikely to be the last.  There is scope for another rate cut in Q2.   The Aussie was quickly marked down a 1.5 cents to $0.7650 and recorded the session low near $0.7625 a couple of hours later.  It has found a better bit in the European morning.   The $0.7700 may cap initial upticks. 

The Aussie's drop dragged down the New Zealand dollar almost as much.  The Kiwi fell through $0.7200 late in the Asian session and is straddling that area in the European morning.  The $0.7220-$0.7740 area looks like the proximate ceiling. 

The continued recovery in oil prices may be helping the Canadian dollar resist the Antipodean push.  Oil prices are higher for the fourth session.  The recovery in oil prices also appears to be aiding the Norwegian krone, which is the strongest of the majors, up 0.3% today, and the Russian ruble, which is the strongest of the emerging market currencies, with a 2.4% gain.  The winter storms, coupled with the strike at several refineries, and news of a sharp drop in US oil rigs last week have fueled a recovery an $8 dollar rally in the March WTI futures contract off last Thursday low contract low of $43.58. 

As we have noted before, there is an a weak relationship between US rig count and production.  Specifically, the oil rig count fell by 94 last week, according to Baker-Hughes, to 1223.  This is a three-year low.  Output for the week ending January 23 was 9.21 mln barrels a day, which is the most since EIA records began in 1983.A strike a refineries would seem to be negative for crude oil prices.  It points to increase stockpiles after EIA reported another large jump in inventory last week.  The EIA and API report new figures tomorrow.  

The other major story today is the positive market reception to  Greece's proposals.  The essence of the new government's proposals is for a bond swap.  It wants to exchange its bonds in the official sector with growth-linked bonds and perpetual bonds for the ECB.  It also wants the ECB to continue to continue funding Greek banks through a transition period lasting through May.  In exchange, it is committed to running a primary budget surplus, even if it means it cannot fulfill its public spending promises.  It also promises structural reforms and more robust tax collection. 

The Greek 10-year bond yield has fallen 100 bp, and 3-year bond yield has plunged over 200 bp.  Greek stocks have rallied 7-8%.  It has had a positive impact on peripheral debt, where Spain, Italy and Portuguese 10-year yields are off 5-7 bp.  Core bond yields are 2-4 bp higher, which means spread compression.   News that Italian deflation deepened in January (-0.4% year-over-year from -0.1% in December) and that Spanish unemployment did not rise as much as expected (78k instead of the consensus of 88k) helped support the peripheral bonds as well. 

There should be no doubt that European officials will respond with counter-offers.  But, the fact of the matter is that for the first time since the election, there is greater confidence in our assessment that the basis of a compromise exists and that talk about a Grexit is premature. 

Separately, the UK reported its second better than expected PMI and sterling still cannot distance itself from the $1.50 area.  Resistance is seen in the $1.5080-$1.5100 range.  Yesterday the UK reported a better than expected manufacturing PMI.  Today it was a better construction PMI (59.1 from 57.6 vs. consensus 57.0).  Tomorrow is the most important PMI, the service sector.  It is expected to improve from 55.8 to 56.3. 

In the US, December factory orders and January auto sales are the main features.  Factory orders are bound to be weak after the larger than expected slump in durable goods orders (-3.4%) and the sharp downward revision to the November series (-2.1% from -0.7%).   Auto sales are expected to have slowed from the 16.8 mln unit pace in December though US-based producers are projected to have increased market share.    Two Fed presidents speak today (Bullard and Kocherlakota).  Neither are voting members.  The former leans a bit to the hawkish side while the latter is among the most dovish.   Kocherlakota has signaled intentions to step down this year.