European Summary and Highlights 06 Feb

European morning session

The USD reversed the losses seen in Asia through the European morning session, with EUR/USD falling back below the Asia open to a low of 1.0725 after opening at 1.0750. EUR/USD actually saw some initial gains after a stronger than expected German manufacturing orders number for December, which showed a whopping 8.9% m/m rise and took the 3m/3m trend slightly above 0. However, the gains proved short-lived, with the decline helped by equities falling back after early gains.

Other currencies held up better against the USD, but generally returned to Asia opening levels after early gains, although the AUD outperformed slightly, holding gains of around 10 pips from the Asian open.

Other than the German orders data, there wasn’t a lot of news, with Eurozone retail sales marginally weaker than expected in December, and Italian confidence numbers edging a little higher, while UK construction PMI showed a modest gain.

Asia session

The RBA meeting on Feb 6th kept rates on hold at 4.35% as per our forecast. The RBA also left doors open for further tightening and continue to suggest data dependency to lead the future path. The key forward guidance statement of "Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks." has changed to "The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out.". While market participants are reading such change in forward guidance to be hawkish, the forward guidance seems to only suggest data dependency remains and door remains open for tightening. We do not see the RBA to hike further because the room to balance between economics growth and inflation dynamics are minimal. The AUD/USD got a shot in the arm from regional sentiment pumped on supportive headline from the Chinese government. AUD/USD is 0.41% higher at 0.6509, NZD/USD is also 0.26% higher at 0.6069 while USD/CAD slipped 0.19%.

The Japanese December Labor cash earning has improved from 0.2% in November to 1%. Despite it is still far from the 2% "sustainable" level, it is good enough for market participants to hope for accelerating wage growth after the spring wage negotiation. Yet, household spending remain depressed for negative real wage restrains household balance sheet.  Both the U.S. Treasury and JGB yields retreated across the curve. USD/JPY followed broad USD movement to trade 0.19% lower at 148.39. Elsewhere, EUR/USD is up 0.07% and GBP/USD is up 0.11%.