Asia Session: No Deal For Greece... Yet

The RBA cut its growth and inflation forecasts for 2012 as uncertainty surrounding economic conditions offshore flow into the domestic economy. On Tuesday, the bank decided to keep interest rates at 4.25%, surprising a market that was looking for a 0.25% cut, however this recent report is more dovish than expected which means economists might get there cut next month.

Australia's 2012 growth forecast is now 3.5%, down from the RBA's November estimate of 4%. The bank's 2012 inflation forecast was also revised down to 3.0% from 3.25%, while underlying inflation is predicted to be 2.75%. The underlying theme from the bank of late has been concern the European debt crisis will significantly hinder the Australian economy. At the same time, the bank noted the negative impact the high AUD is having on parts of the domestic economy, especially trade-exposed sectors.

Overall, we think the report is evidence the RBA will move to loosen policy next month. Whilst the bank noted that conditions in Europe have improved in the first part of 2012, there is still a significant amount of downside risk. Furthermore, non-mining sectors in Australia continue to suffer from diminished levels of demand and employment is also effect to suffer. So, combining this with an inflation rate that is expected to stay between 2-3% - it may open the door for more policy easing.

Before equity markets opened in the region, a meeting of European finance ministers rejected an apparent EUR3.3 billion package of Greek budget cuts that Athens presented in the hope they would receive a EUR130 billion bail-out package. Athens now has to find a way to trim another EUR325 million of its budget this year and ensure there is parliamentary approval of the updated reforms package. Also, Luxembourg's PM Juncker made it clear that Greece must assure them that all of its major political parties will support the package come April when General elections are held.

In the second half of the session, trade figures were released in China. The country's trade surplus increased to USD27.28 billion, higher than the expected USD10.4 billion figure. Worryingly, Beijing's imports fell 15.3%y/y, much more than consensus estimates of -3.6%y/y. Moreover, exports slid 0.5%y/y which is moderately higher than economists expected (conses -1.4%y/y).

Recently, a lot of focus has been on the Chinese export market; however, we are more concerned about the contraction in imports. This is the first negative import growth figure since 2009 and the second straight month of declines, which tells us domestic demand is falling, despite the figure being likely distorted by scores of manufactures shutting down production during the lunar New Year holiday.

A slew of negative headlines saw significant saw significant moves away from risk assets. The aussie was in reach of 1.0800 against USD before negative sentiment took hold and investors started pricing in a rate cut next month, causing the pair to sink to a low of around 1.0715. In comparison, the euro didn't have such a bad day, it managed to hold above 1.3250 against the dollar, posting a low around 1.3258. Equities in Asia also couldn't escape the risk sell-off, with the AUS200 and JPN225 falling around 0.80% and 0.26% respectively at the time of writing.

Once again, investor sentiment in Europe will likely by dominated by concerns surrounding the ability of officials in Athens to meet the Feb 15 deadline and ensure it receives its second bail-out package. Nevertheless, attention may momentarily shift to the US for the release of trade balance data at 13:30GMT.