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RBA joined its global counterparts in easing policy The Reserve Bank of Australia cut its benchmark interest rate by 25 bps to 2.25%, and joined its global counterparts in easing policy. Several central banks have loosened their monetary policy in recent weeks, from Denmark to India and now Australia, to stave off deflationary pressures on the back of low oil prices. In the statement following the decision, Governor Glenn Stevens said that that output growth will probably remain below average for somewhat longer, and the rate of unemployment could peak a little higher, than earlier expected. The economy is likely to be operating with a degree of spare capacity for some time yet. Therefore, a further reduction in the interest rate was appropriate to boost growth and prices.

The central bank remained concerned about the housing market and in the statement it said that “The Bank is working with other regulators to assess and contain economic risks that may arise from the housing market.” The Bank will most likely increase the macroprudential tools to offset the level of house loans and take the heat out of the housing market. Therefore, with interest rates now at record lows the impact on housing prices will be watched closely. AUD/USD dropped sharply on the announcement of a rate cut, to its lowest level since May 2009. The fall was halted around 0.7650 support line, but given the absence of price pressures in the economy, the low oil and commodity prices, and the possibility of another rate cut at a future meeting, AUD/USD is likely to remain under selling pressure and we could see further declines at least until 0.7500 in the near future.

Oil prices rose after news that drillers pulled 94 rigs from US fields last week and a refinery strike, the biggest since 1980, could tighten gasoline supply. US benchmark West Texas Intermediate gained approximately 10% since Friday’s news on the drop in oil rigs to a three-year low, while Brent rose 6%. We believe that fundamentally, nothing has changed dramatically and there are no signs of sustainable reduced global output. The recent rise in oil prices could be seen as bear market correction.

Today’s highlights: During the European day, the only noteworthy indicator we get is the UK construction PMI for January.

In the US, factory orders for December are expected to fall at an accelerating pace.

In New Zealand, the Q4 unemployment rate is anticipated to decline somewhat, while the participation rate is expected to increase and average hourly earnings are forecast to decal erate. Last week, the RBNZ remained on hold but went from a tightening bias to a neutral bias and even held out the possibility that the next move in rates would be a cut. This together with the decline of the inflation rate below the lower boundary of the Bank’s range target of 1%-3% over the medium term, kept Kiwi under increased selling pressure. The positive labor market data however and the fact that the pair is trading near a strong support level could push NZD/USD up before the bears prevail again.

We have two Fed speakers on Tuesday’s agenda: St. Louis Fed President James Bullard and Minneapolis Fed President Narayana Kocherlakota speak.

Tuesday, 03 Feb, 2015 / 1:55

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