RBA says Aussie dollar still high given state of economy

Share Markets:

US share markets fell overnight, driven by declines in the shares of consumer and technology companies. 

The appreciation in the US dollar is also causing investors to reassess the earnings outlook for US companies. 

At the close, the Dow Jones was down 0.2% and the S&P 500 index was also off 0.2%.

Interest Rates:

US 10-year treasury yields slightly extended a multi-day decline to 2.10%, but the 2-year yield bounced off 0.67% to 0.71%, flattening the curve by 3bp.

A 10-year auction went well, with foreign investors again notable (up to 59% of the winning bids).

German 10-year bund yields fell further, from 0.24% to 0.19% - a multi-decade low.

The spread between US and German 10-year rates reached a 26-year high of 194bp.

Australian 3-year government bond future yields initially fell from 1.88% to 1.85% and then consolidated.

The 10-year yield also fell, from 2.55% to 2.51%, before trading largely in a range.

Foreign Exchange:

The US dollar index accelerated higher, outperforming all the majors and making a fresh 12-year high.

Meanwhile, EUR/USD fell to a 12-year low of 1.0511.

USD/JPY ranged between 121.15 and 121.63. AUD/USD was steady during the London morning but then fell from 0.7633 to a six-year low of 0.7561.

It subsequently moved back near the 0.7600 handle.  The NZD jumped one US cent in the wake of the RBNZ statement, causing AUD/NZD to fall sharply.


The price of Brent crude oil snapped a five-day losing streak but the West Texas Intermediate price of oil fell to a two-week low. 

The latter fell after the Energy Information Administration in the US said US crude supplies expanded to 448.9 million barrels last week, the highest level since weekly data started in 1982. 

The price of gold also slumped, as the USD strengthened overnight.


In a speech yesterday, RBA Assistant Governor Kent said the Australian dollar is still "relatively high given the state of our overall economy".

Following the decline in business confidence for February, Kent said "unfortunately, we don't have a confidence lever, we do what we can by having interest rates low."

Housing finance for owner occupiers fell 3.5% in January, more than retracing a 2.7% lift in December.

The annual pace of growth softened further, contracting by 0.2%.

However, while growth has waned, the level of loans remains elevated and suggests demand is still buoyant.           

Demand for investor housing loans was relatively resilient. The value of investor loans declined just 0.1%, following a solid 6.4% gain in December.

The proportion of investor loans rose to 41.4% in January, the highest on record.

The Westpac-MI measure of consumer sentiment fell 1.2% to 99.5 in March. It followed a jump in February in the wake of a rate cut from the RBA.

The index now sits just below 100 signalling pessimists slightly outweigh optimists.


Economic data released in China yesterday was disappointing. Industrial production was weaker than expected, rising by 6.8% in the year to January-February, combined.

This was the weakest January-February annual result since 2009.

Fixed asset investment increased 13.9% in the year to January-February.

Retail sales rose 10.7% in the January-February period from a year earlier. It was lower than consensus estimates for an 11.7% rise.


German labour costs decelerated to 2.0% in the year to Q4 2014, still the second highest reading since the middle of 2013.

Meanwhile French non-farm employment growth was confirmed at 0.0% in Q4, marking nearly 4 years (since mid 2011) without jobs growth (except for 0.1% in Q4 2013, payrolls have been flat or falling for 16 quarters).

Even so, the jobless rate has changed little over the past year.


Capital expenditure in Japan remains weak.

Machine orders fell 1.7% in January, although the decline was less sharp than consensus median expectations, following an 8.3% increase in December.

For the year to January, machine orders are up 1.9%.

New Zealand:

The Reserve Bank of New Zealand (RBNZ) this morning left the official cash rate (OCR) unchanged at 3.50%. 

The RBNZ has left the OCR unchanged since July 2014, as the bank assesses the impact of four earlier increases. 

The statement said that inflation is expected to stay low this year before gradually returning to the 2% midpoint of the central bank's 1-3% target band. 

The statement also suggested an "extended" period of stability in rates was needed.

United Kingdom:

Industrial production was down 0.1% in January, following a 0.2% December fall.

The latest fall reflected a sharp 0.5% decline in manufacturing, led by electronics and offset by a 2% rise in mining output and a 2.4% rise in oil extraction.

Although annual growth in industrial production accelerated from 0.8% year-on-year in December to 1.3% year-on-year in January, manufacturing output growth slowed 0.7 ppts to annual growth of 1.9%. 

This latter pace was slower than at any point in 2014, but still faster than in all of 2012 and 2013.

The latest outcome validates the slower PMI readings through much of 2014, but is yet to capture the more recent survey upswing.

Even so, Bank of England MPC member Weale, who dropped his call for an immediate rate hike at the start of this year, said today that the decision was still "finely balanced".

United States:

The NFIB Small Business Optimism index lifted from 97.9 in January to 98.0 in February. 

It indicates that small businesses continue to catch their breath following an apparent post mid-term election surge in December.

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