RBA In No Rush
The minutes from the RBA’s June 6 meeting showed no sign of panic, and the decision to cut 25 bp off the cash rate was described as “finely balanced”. The Board also noted that the benefits of the cuts made so far would “flow through the domestic economy over the coming months”, which implies a willingness to wait-and-see before taking additional policy measures. The rates market is pricing in 100 bp in further easing over the next 12m, however our Australia economists conclude from these minutes that we are nearer the end of the cutting cycle than current market pricing suggests. They now sees a reduced chance of a cut in July, but still call for 25 bp of further easing at the August meeting. Elsewhere headlines from a draft G20 communique have made their way onto the newswires. Indications are that the final text may set out in detail Europe’s aims for a more integrated banking system and even some steps towards closer fiscal integration. Elsewhere, investors continue to debate whether the ECB will reactive its SMP program in a bid to drive down Spanish sovereign yields which yesterday reached new Eurozone highs. A reactivation would likely be a significant short-term euro positive, however we do not see much chance of this in advance of the EU Summit on June 28-29, even though Spanish bond markets may remain under stress as Thursday’s auction approaches. Yesterday’s revelations that deposits in
the Spanish banking sector dropped by 2.52% m/m in April have not helped sentiment. Greece is still without a government in the wake of the weekend election, although we do see a government emerge once coalition negotiations have concluded – the only question is how long such an administration can survive. Today, the Bank of England is due to announce the size of the inaugural auction of its Extended Collateral Term Liquidity Facility which is due to take place on Wednesday. With investors currently inclined to reward the currencies of proactive central banks, any auction size greater than GBP 5 bn could eventually trigger some sterling upside, after what would be an initial bout of sterling weakness.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank