Potential central bank easing excites investors

15.15 AEST, Wednesday 24 April 2013

Potential central bank easing excites investors

By Tim Waterer (Senior Trader, CMC Markets)

Investors certainly have not lost their excitement when it comes to the prospect of more central bank easing measures, with negative economic indicators seemingly providing a means to further interest rate cuts. With German data of late not looking particularly optimistic traders are now positioning for the ECB to pull the trigger on an interest rate cut, and while the move is supportive of equity markets the Euro has under-performed in the currency market with more easing measures now on the table.

Benign Australian CPI data has resulted in divergent moves from the ASX200 and the Australian Dollar today with the RBA apparently not needing to worry about inflationary pressures when deliberating on interest rates over the coming months. Australian equities have found renewed fervour this week and with the low inflation print increasing the chances of an interest rate cut, traders did not need a second invitation to get on board with equities today. Financial stocks were among the big winners, with all the big four banks surging on the outlook that another interest rate cut may be on the cards after the inflation data.

But the moves higher were not restricted to Australia.

There was no shortage of green numbers across Asian markets today with the positive lead from European and US indices translating into notable gains among the major bourses with traders anticipating that further central bank easing could be in store. With extended Yen weakness looking like a given, the Nikkei jumped higher in what has become a common occurrence. While elsewhere across the region today, gains well in excess of 1% seemed to be the norm.

While equity markets enjoyed the proceedings today, the same could not be said of the Australian Dollar which gave up ground following the low CPI print. The AUDUSD rate initially fell around one third of a cent as traders ramped up expectations of future interest rate easing, though the currency did bounce off the session lows. Despite the CPI numbers today, if the general financial environment remains in risk-on mode this should see the AUD find buying support with the currency still looking attractive from a yield perspective. The CPI data may have indicated that the RBA can cut rates without any inflation concerns, however it is far from a done deal that we will see a rate reduction in May particularly with so much still to play out on the international stage.

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