India's Second Rate-Cut Suprise

Indian surprise

The Reserve Bank of India has announced a surprise cut its key interest rate for the second time this year.

The unexpected rate cut of 25 bps to 7.5% comes only four days after Prime Minister Modi announced big plans to boost Indian growth through corporate tax cuts and increased infrastructure spending.

Speaking live from Saxo Bank's Asian desk in Singapore, Christoffer Moltke-Leth says it appears that India’s new government has a very firm mandate to fight problems of high inflation, rising budget deficits and poor domestic demand. "A fresh government estimate predicted 8.1-8.5% GDP growth this year and If the official growth target is meet is will make India the fastest growing major economy in the world."

This is exciting news for Saxo's head of equities, Peter Garnry. "There is still a lot of interesting growth stories in the emerging markets and India is definitely one of those. It still has a very big focus from institutional investors so flows will continue from that direction, and it looks like the government is following up on its promises in terms of reforms."

Garnry is concerned about weak growth in Russia and Eastern Europe, however, after Henkel, the German maker of Persil detergents and Schwarzkopf shampoos, reported a Q4 EBIT of EUR602 million compared to an expected EUR628mn.

"This confirms that there has been a significant slowdown in Eastern Europe and Russia due to the Ukraine conflict and Russian sanctions, and the situation doesn't look like it will change any time soon." he says. Keep an eye out, he says, for an earnings release from Adidas tomorrow, as the sports firm is also heavily reliant on the Russian market.

Not so lucky country

It's also a gloomy story down under, where Australia’s Q4 GDP came out at 0.5% quarter-on-quarter, down from 0.3% in Q3, but missing expectations of 0.6%.

"It may get a bit worse in the months ahead as the big deterioration in Australia’s terms of trade are only just beginning to be felt," says Moltke-Leth. "AUD/USD traded almost flat in the mid-session with initial gains wiped out as the market was not impressed."

Moltke-Leth adds that USD/JPY traded with a slightly positive undertone with a retest of 119.50 rejected. USD/CAD continued to recover some of the losses after the stronger than expected Canadian GDP figure and ahead of Bank of Canada’s policy decision later today.

USD resilient, but indecisive

The dollar needs to find some direction from event risks this week, says Saxo Bank's head of forex strategy John J Hardy.

"The dollar is tending to get sold off during the day then it seems to recover, and that was the case yesterday," he says.

He says it looks like the market is indecisive and wants some more inputs, which it's not going to get until today's data – namely the US ISM non-manufacturing data, ADP payrolls and of course the ECB meeting tomorrow and Friday's US payrolls data.

"By the end of this week i would certainly hope we're getting something going on, either a squeeze or a continuation of the dollar rally and EUR/USD sell-off."

EUR/SEK bull market finished?

The Swedish krona was one point of interest yesterday, says Hardy. EUR/SEK rallied on Friday on a strong GDP report, but a Riksbank governor said yesterday that he'd seen signs of inflation bottoming. "Since Riksbank policy and krona weakness is all about worrying about inflation, then any sort of let up on the inflation front sees the SEK stronger. I think we've made a key shift here and we're looking at a lower EUR/SEK in the weeks and months to come."

Vols heading lower

Vols are also waiting for direction from tomorrow's ECB meeting, says Saxo Bank FX options trader Kresten Bechmann. "We are continuing to see vols heading lower and we're not too far from the yearly low which we saw in vols a few weeks ago.If we don't see a new low in EUR/USD and a break below 1,11 again, then we'll definitely see them much lower tomorrow."

Nana Arkouzis Dahlerup, Saxo's global head of FX spot adds: "There is the Greek T-Bill auction today and if the result is bad the result might be postponed. 800mn are held by foreigners and there's quite a lot of speculation that these T-bills won't be won't be inclined to roll so we might see a bad result - maybe it will have an effect in the market in the euro."

And it's been a fairly quiet start to the week in the bonds market, says Saxo bank bonds trader Michael Boye. "Core yields continue to rise slowly. The U.S. 10-Year Treasury yield closed at 2.12%, very close to a new high for the year."