RBA Stays Course
The RBA sounded a cautious but steady tone with its release of policy meeting minutes, but this could not prevent AUD from taking a knock after commercial entities voiced concerns about Chinese demand for resources. The reaction function for the AUD just goes to show how the individual exposures for various currencies matter at this point, especially within the risk bloc, and investors have become more mindful of individual catalysts. Our flow monitor for past week, in emerging markets for example, showed broad-based liquidation out of these risk currencies in favour of the dollar, yet the past sessions have been characterised by a positive risk environment, another confirmation of our view that the market is continuing to price out the dollar as a funder, and this is will continue to register through currency and fixed income markets, and so far policymakers appear willing to tolerate the moves. Dovish Fed members William Dudley yesterday also acknowledged some degree of conditionality and uncertainty about the further need for stimulus in the coming months, though in all likelihood more debate would occur heading into the end of current operations. Fed Chairman Bernanke will be speaking later today, while Treasury Secretary Geithner is also set to testify on the international financial system in Washington, and Eurozone observers may be interested in whether the US is any closer to providing funding for their firewall via the IMF at this point. UK CPI figures are also set to show another drop in headline inflation to 3.0% – levels which no longer risk triggering a letter to the Chancellor, which to some extent would confirm the BoE’s views on price pressures through the decision to commence the latest round of asset purchases. Nonetheless, rhetoric from the likes of the ECB has been slightly more cautious on price pressures of late, and policymakers will be especially in bind if headline inflation begins to eat into the real economy at the wrong point in the cycle. EURUSD traded 1.3226-1.3245 and USDJPY 83.36-83.50.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank