RBA cuts rates and European markets start to look optimistic

The Australian dollar was the big news story today, as the Reserve Bank of Australia (RBA) cut interest rates by 25 basis points to 2.0%. The market was very volatile as a result of this move, but there are still strong worries for the Australian economy as it continues to look weak in the short to medium term. Certainly with the cutting of interest rates it leads to a double edged sword scenario, where it gives capital expenditure a boost in Australia with the low rates, but at the same time it spurs on the property market which has been seen as a massive problem by the RBA. The RBA for the most part has steered away from rate cuts in previous years but current market conditions, with the strengthening Australian dollar and poor performance of the economy, have made a cut inevitable for the RBA.

Going forward, it’s likely that the last of these rate cuts are not over just yet. The government’s fiscal position has ballooned out of control and the economy looks likely to suffer with falling commodity prices (especially iron ore) and a strong currency. Certainly it feels like the Australian economy is at the mercy of the markets after a decade of strong growth. If the rate cuts fail to produce a fall in the currency it may be possible that we see currency intervention, which has been previously brought up by an Assistant Governor of the RBA. Despite all of this, there is still strong buying pressure on the Aussie dollar as the market has viewed this as a favorable move, and we could see further bullish appreciation, especially in the AUDNZD cross.

The USD received a helping hand as US Factory Orders m/m lifted to 2.1% compared to the previous month’s 0.2%, this will bode well for the FED which is looking down the barrel of US economy weakness as of late. For many this has led to a welcome boost in dollar buying, but the week ahead will certainly provide a lot more information for investor confidence with the labour market data that is due out. If anything the FED will also be paying close attention, and strong labour figures may cause it to retract on its previous statement and talk up a rate rise by the end of the year.

The Oil (WTI) market has been somewhat reserved in early trading, but there still looks to be demand, and it’s likely we will see another push for the $60 dollar level. While many have been hoping for a strong pullback similar to what we have seen on the charts, this is unlikely to happen especially when you compare to the 2008 drop in prices. The market has weak demand at present and oversupply, so bullish movements will be slow and it’s likely it will take a number of years to reach the $100 mark anytime soon. Certainly any pickup in labour number will add momentum to oil pushing through the 60 dollar resistance barrier it presently faces.

The DAX is likely to be one of the most important trades this week, as Greek asset sales are set to go ahead which will help take pressure of the bearish momentum that has been occurring. Recent German manufacturing data has also prompted an appreciation for the index, despite some weakness in other Eurozone nations. On top of all this, the most recent economic forecasts out from the European Central Bank (ECB) point to growth in the Eurozone picking up by 1.8% in 2015. Additionally inflation worries according to the EBC have subsided, with inflation expected to be 1.5% in 2016. This is all forecasting, but the rise in oil prices will certainly help with the pickup in inflation in the Eurozone; on the subject of growth I am a little concerned as time and time again forecasts have been wrong about growth in Greece, and the ECB expect GDP and investment to lift of in the struggling nation, which so far has defied all future projections previously over the last 5 years.