Bank Downgrades Knock AUD
The Australian dollar fell towards the end of the Asia session after Fitch downgraded the ratings of three Australian banks. Earlier, AUD got a modest boost from parliamentary testimony by RBA Governor Stevens who painted a relatively upbeat picture of the economic outlook. Crucially, he stuck to previous guidance and did not suggest the RBA is poised to cut the cash rate. Looking to external risks, Stevens said China is getting on top of its problems around inflation and the property market. However, he sounded more cautious on Europe, noting anxiety over the sovereign debt crisis has not gone away, nor will it for some time. EURNOK traded back above 7.50 overnight, having forcefully broken below a key support level at 7.48 yesterday. With approval in principle now granted for a new Greek aid program, and FX volatilities at multi-year lows, conditions look right for investors to add to risk positions for another week or so – especially in the run-up to the ECB’s LTRO on Feb. 29. However, we recommend staying nimble given questions remain over how smoothly the PSI transaction will proceed, especially now that a credit event seems increasingly likely. Also we remain on guard for ratings actions over the coming weeks in response to the ECB’s acquisition of de facto super-senior status. Overnight EURUSD traded in a 1.3316-1.3380 range, USDJPY 79.86-80.46.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank