The Reserve Bank of Australia defied expectations and left rates on hold earlier today. This has lifted the Australian dollar back to yesterday's highs near $0.7845 where it stalled. The derivatives market had discounted nearly a 2/3 chance of a cut today. The RBA's statement indicates the door is open to further easing, and most analysts will simply push out the expectation to April and May. We look for one cut in Q2 though some investment banks forecast two cuts. 

Tomorrow Australia reports Q4 GDP, and its is expected to have expanded by 0.6% after a 0.3% pace in Q3. Stronger retail sales and better net exports are thought to be the main drivers. Earlier today, Q4 current account was released. It stood at A$9.6 bln. The consensus was for a A$11 bln shortfall after a revised A$12.1 bln (from A$12.5) deficit in Q3. Net exports were 0.7% of GDP, slightly better than consensus. 

Separately Australia also reported building approvals. They jumped 7.9% in January. The consensus was braced for a 2% decline. The December series was revised to -2.8% from -3.3% initially reported. This is a volatile series, but it is the third month that the year-over-year pace has been north of 9%.  

Japan reported a larger than expected rise in labor cash earnings. The 1.3% increase compares with a consensus forecast of 0.5% and follows a similar rise in December (revised from 1.6%). After contracting in the April-September period, the Japanese economy finished the year on a up note.  The labor market has tightened, and political pressure has been brought to bear to encourage companies to raise wages.  However, adjusting for inflation real wages remain negative. The government and the BOJ are watching the spring wage round to see if the missing component of Abenomics begins to be seen. 

Meanwhile, the dollar has been pushed back below JPY120. Since February 12 when "sources close to the BOJ" opined that further yen weakness cut hurt consumer sentiment, the market has been reluctant to press ahead. Earlier today, Abe's adviser Honda suggested the dollar was near the upper limit of its comfort zone.   

The market may need some fresh incentive to mount a sustained challenge. If the Federal Reserve drops the "patience" forward guidance later this month as we expect, this could encourage a challenge, especially as the short yen speculative positions in the futures market have been nearly halved since early-December (gross short peaking at 153k in early December and stood at 79.1k as of last Tuesday).  

News from Europe was also generally better than expected. In particular, we note that Germany retail sales jumped 2.9% in January. The consensus forecast a 0.4% increase while the December series was revised to 0.6% from 0.2%. Auto registrations (sales) rose 7% in February. The lowest unemployment rate since reunification and upward pressure on wages may have helped.   

Separately, Spain reported a 13.5k decline in unemployment in February. This was more than four times the decline that the market expected.   It follows the nearly 78k increase in January. While the Spanish economy remains relatively strong within the euro area, the pace of activity appears to be leveling off. 

Turning to non-EMU countries, we note that the UK reported its second stronger than expected PMI for the week. The construction PMI for February came in at 60.1 from 59.1, beating expectations that had anticipated a small decline. This follows the 54.1 reading of the manufacturing PMI yesterday that increased from 53.1. The service PMI, which covers the largest part of the UK economy, will be reported tomorrow. After a modest slowing in the UK economy beginning around the middle of last year, it appears to be re-accelerating.  

This is gradually taking on toll on the short-term UK rates. The December 2015 short-sterling futures contract has seen in the implied yield from 66 bp in mid-January to 83 bp now. Sterling itself is not finding much traction. It briefly dipped below the 20-day moving average for the first time since early February. The euro is stalled near GBP0.7300 for the third consecutive session and appears likely to resume its decline. 

Switzerland reported a 0.6% expansion in Q4, twice what the consensus expectation. This illustrates another a key point that is also seen in Sweden. Deflation can co-exist with an expanding economy. Sweden’s growth numbers have surprised to the upside recently, leaving aside yesterday’s manufacturing PMI. The krona has been lifted today by comments from Riksbank Governor Ingves, who sounded optimistic, suggesting healthy economic developments and expectations for inflation to rise soon. The euro was sold through SEK9.30 today for the first time since late-January, off of which the euro rallied though SEK9.68 by the middle of February. Some Riksbank members, like Skinglsley may become more concerned should further SEK strength materialize. 

In North America today, the main US data is in the form of February auto sales. A small increase is expected. Canada reports Q4 GDP (expected 2.0%). Tomorrow the Bank of Canada meets. Recent comments from Governor Poloz have reduced expectations for another cut after the January surprise.