Euro Down on Political Fears, Aussie Falls on Retail Sales Miss

The Euro fell as political jitters threatened crisis-fighting efforts once again while the Aussie Dollar fell after soft Retail Sales data drove RBA rate cut bets.

Talking Points

Australian Dollar Sinks as Retail Sales Miss Boosts RBA Rate Cut Bets
Euro Pressured by Eurozone Political Instability Jitters Once Again
Japanese Yen May Rise as US Fiscal Policy Worries Drive Haven Flows

The Australian Dollar is underperforming in the wake of disappointing Retail Sales data. Receipts unexpectedly fell 0.2 percent in December. In level terms, sales registered at A$21.4 billion, the lowest in five months. The release reinforced building RBA interest rate cut expectations in the wake of yesterday’s dovish policy statement. The markets are now pricing in a 55 percent chance of a 25bps reduction at the March RBA meeting, according to data from Credit Suisse.

The Euro is under pressure amid fears about emerging political instability that may undermine the single currency bloc’s crisis-fighting efforts. First in Italy, a new Ipsos poll showed that gap between controversial former Prime Minister Silvio Berlusconi and Democratic Party leader Pier Luigi Bersani narrowed to 2.1 percentage points, a print within the margin of error. The spread between Italian and benchmark German 10-year bond yields widened as traders worried that critical reforms pushed forward by the outgoing administration of Mario Monti will be undermined if Berlusconi returns to power.

Meanwhile, Germany’s Die Welt newspaper reported that Ireland and Portugal will be looking for ECB support through the as-yet inactive OMT bond-purchase program for their upcoming debt issuance. Further, the latter country was tipped to be asking for an extension on its ESM loans, pushing out the maturity to 10-15 years. Finally, ratings giant Fitch said Spain was “pivotal” for the Eurozone and warned that the country has the potential to “drag the [region] down again”.

Looking ahead, the economic calendar is uneventful in US hours and S&P 500 futures are trading flat ahead of the opening bell on Wall Street, offering no clear guidance on risk appetite trends. Sentiment continues to appear vulnerable however, threatened by the re-emergence of concerns about the impact of US austerity on global growth the so-called “sequester” spending cuts loom ahead. As we discussed earlier in the week, another last-minute deal seems likely but some additional fiscal retrenchment seems almost certainly in the cards. Most notably, such an outcome may spill over into the FX space by directing haven flows into the Japanese Yen, forcing a correction of recent weakness.

Asia Session:

GMT

CCY

EVENT

ACT

EXP

0:01

GBP

BRC Shop Price Index (YoY) (JAN)

0.6%

–

1.5%

0:30

AUD

Retail Sales Ex Inflation(QoQ) (4Q)

0.1%

0.3%

-0.3% (R-)

0:30

AUD

Retail Sales s.a. (MoM) (DEC)

-0.2%

0.3%

-0.2% (R-)

Euro Session:

GMT

CCY

EVENT

EXP/ACT

IMPACT