• RBA on hold, but leaves door open The RBA remained on hold overnight as was widely expected, but signalled that continued low inflation may provide scope for further easing, should that be appropriate to support demand. The Bank’s statement acknowledged the global turmoil and the risks that poses to domestic conditions, which could explain the fall in AUD following the decision. However, officials did not revise down their forecasts for the country’s economic outlook, noting improvements in domestic conditions. On Friday, the RBA releases its Statement on Monetary policy which will provide new forecasts on Australia’s economy. So, the Board will now have to assess the effects of global headwinds based on new information. Therefore, we expect the negative sentiment towards the Aussie to continue until Friday. If the updated forecasts show that the Bank now expects domestic growth or inflation to moderate as a result of global developments, the currency could fall further.
• Fed’s Fischer: Difficult to judge the impact of the recent turmoil on US economy Fed’s Vice-Chair Fischer stated that if global developments lead to persistent tightening of financial conditions, they could signal a slowing global economy that may affect growth and inflation in the US. Fischer’s remarks follow a week of soft economic data out of the US, which showed a significant slowdown in Q4 growth and flat consumer spending in December. These data have already raised concerns on whether growth and inflationary pressures have continued being soft in Q1, which affected expectations on the Fed’s pace of normalization. Currently, markets only price in one more rate hike in 2016 compared to the Fed’s expectations of 3-4. Fisher’s comments came to add to these worries, something that could push market expectations further back. As a result, we could see the greenback losing some of the steam it has gained so far in the year.
• Today’s highlights: During the European day, the calendar is relatively light. The indicator that will probably attract most of investors’ attention is the UK construction PMI for January. The index is forecast to have declined to 57.5 from 57.8 in December, but given Monday’s unexpected improvement in the manufacturing PMI, we see the likelihood for a positive surprise in the construction data as well. This could support the pound, at least temporarily. Signs of improvement in the manufacturing and construction sectors could be some early evidence that the UK economy has entered the year on a stronger footing. However, the picture will get clearer on Wednesday, when we get the service-sector PMI as this sector holds the reins of the British growth.
• In the Eurozone, the bloc’s unemployment rate for December and the German unemployment rate for January are coming out. Both the rates are expected to have remained unchanged and as a result, we expect the reaction in the common currency to be minimal at these releases. We get Eurozone’s PPI for December as well.
• As for the speakers, SNB President Thomas Jordan, ECB Executive Board member Benoit Coeure and Kansas City Fed President Esther George speak.