It’s Australia day Monday and while we’ll all be celebrating, global markets will get rolling in what is likely to be a huge week’s trade.
For Australia the big (and very welcome) news is that the Aussie dollar will be starting the week below 80 cents for the first time since July 2009. It closed at 0.7905 on Saturday morning.
It’s a move that takes some pressure off the RBA to ease rates in February. But the release of Australia’s Q4 2014 CPI on Wednesday, and the likely fall in year-on-year inflation below the bottom of the 2% floor on the RBA’s inflation band, increases chances the RBA will be pressured into an easing on February 2nd when the Board next meets.
It’s a close run argument at the moment with the debate raging in the economics fraternity about whether or not the RBA needs to cut next week. The CPI may not settle this unless we see an unusually large or small number.
But Westpac Chief Economist Bill Evans reckons a February cut is coming, and wrote Friday that:
We remain comfortable with our view that the RBA will cut in February while pointing out the importance of the Inflation Report, its impact on the Bank’s inflation forecasts and the Bank’s need to recognise the clear signals from the current shape of the yield curve, as well as the signal from the recent round of policy decisions by other central banks.
It’s the actions of the ECB and the related surprises from the Bank of Canada, Danish Central Bank, Reserve Bank of India and Swiss National Bank so far in 2015 which is causing as much turmoil as anything else so far in 2015.
What’s at the heart of central bank actions so far this year is competitive devaluations, or currency wars, as a way to kick start their economy at the expense of another (mostly the US).
Muddying the water for those who say the RBA must cut is that the RBA is a winner in the currency war and might be happy with the Aussie below 80 cents.
Markets also hear from the Fed in the US this week with the FOMC holding its first meeting for the year. It releases statement at 6am AEDT Thursday which markets will pore over in great detail.
On traders’ and investors’ minds will be whether the Fed ignores the turmoil offshore – the deflation that is spreading across the globe, the pressure of the unconventional actions by the SNB, ECB and others – which has driven the US dollar to levels not seen in more than a decade in US Dollar Index terms.
Will the Fed temper their stated intentions on raising rates this year. Could they reverse some of the US dollar’s recent strength and release some pressure on the US economy?
Or will the Fed be good central bankers and recognize that the EU really needs a lower Euro and the US might be able to cope with a stronger dollar.
But what does all the turmoil mean for US and global stocks?
What happens to the ASX 200 back above 5,500 for the first time since early November as investors move capital around the global market chess board trying to second guess economic strength, currency rates and growth in earnings for global companies?
All will be revealed as the week runs it course.
But, then again, the release of US GDP for Q4 on Friday night could reignite questions about the recovery in the US all over again with growth expected to decelerate from 5% to 3.3% annualised.
Turning to politics and the Greek election has the potential to see a Syriza victory and an eventual withdrawal of Greece from the EU. Equally news from the Wall Street Journal that the Bundesbank President Jens Weidmann didn’t back the ECB’s QE plan is likely to keep pressure on Europe – but for now Draghi has won.
Here at home in politics the focus will be the last week of the Queensland election, where Campbell Newman has found himself in the fight of his life with polls showing he has a real fight on his hands to retain power despite his towering majority in the current parliament. Some of this is down to the mismanagement of issue after issue by Abbott Ministry. The PM has been ringing backbenchers to settle nerves in recent days and will deliver a major speech on February 2nd in Canberra that will set out his agenda for the year ahead.
Here’s Westpac’s excellent diary of all the important events for the week ahead.