Asia Session: The RBA Looks Set For Another Rate Cut

The FX and equity markets were fairly flat in Asia, with liquidity suffering as a result of New Year celebrations and the resulting closure of most stock markets in the region. At the same time, investors are clearly nervous about the situation in Greece, which may have kept a few traders on the sidelines as they await confirmation from European markets.

There was only one headline data release during the session, with the 4Q Australian PPI figure coming in slightly less than expectations at +0.3% q/q (expected +0.4% q/q). A relatively high aussie dollar should have pushed up the final prices received by producers, but the relatively weak PPI figure could increase the likelihood of another rate cut on Feb 7.

Nevertheless, the RBA will be closely monitoring the CPI figure to be released on Wednesday. The data has the ability to influence the bank's decision in two ways. Firstly, a negative figure will undoubtedly add to the case for a rate cut and a figure around the consensus of 0.2% will also likely provide more scope for a cut, given the downside risk to growth. However, a significantly higher than expected figure could delay the next rate move, despite the unstable conditions offshore, which has been a hallmark reason for the RBA's recent rate cuts.

EUR managed to break back above 1.2900 on a few occasions but could not sustain itself above this level, and on the downside the pair was unwilling to penetrate 1.2850. The aussie faired a little better, but still traded in a fairly tight range around 1.0450 – 1.0494.

In equity markets, AUS200 is currently in the red by around 0.34% and JPN225 is just holding its head above the water by approximately 0.07%.

Trading during the London session will likely be dominated by sentiment surrounding Greece and the upcoming EU summit. Athens and private sector bond holders have still not agreed upon a plan, and whilst it still looks like the market is not pricing in a Greek default yet, everyday that this is drawn-out the euro could suffer. Also, with the lack of deal in Athens, the EU leaders will not be able to sign off on the next round of austerity measures; instead the focus should shift to bringing forward the EUR 500 ESM fund to July.