RBA To Hold In August
Potential policy trajectories are back in the forefront of investor attention as officials seek to ensure the recent weakness in economic conditions does not deteriorate into something more pernicious. The Fed and the ECB are expected to remain at the forefront of activity, though the pace at which accommodation is being pursued continues to differ and FX markets may be edging towards changing their reaction functions towards rewarding aggression. Late during the US session on Tuesday, a Wall Street Journal article reported that FOMC officials are growing increasingly “impatient” with the faltering pace of the US recovery and are therefore “moving closer to taking new steps”. Yet even that failed to give EURUSD a material boost. USDJPY is trading in heavier fashion, but most of the damage was done well before the news and it appears that this pair is already pricing in a new wave stimulus in some shape or form. Equity markets were less impressed in general though and Asian indices are broadly in negative territory. The article has also mentioned the possibility of the Fed reducing the Interest on Reserves. Similar procedures are being mulled elsewhere, but the effect on money markets could prove disruptive, as we have already seen in the Eurozone where the ECB’s deposit rate cut has led to the closure (but not liquidation) of many money-market mutual funds, depriving funding markets of much-needed short-term liquidity. Meanwhile, in Australia CPI came in at 0.5% in Q2, a touch weaker than expected but our economists note that the print means the RBA will likely hold rates. Our economists have adjusted forecasts for policy and now no longer expect any more cuts from the RBA. Upside pressure on the AUD is likely to continue if the RBA conditions accordingly. In addition to stellar sovereign ratings, the yield advantages are now even clearer, especially in an environment where the major economies are seeking new possibilities to reduce borrowing costs and increase money multipliers. Ahead today, German IFO figures are due, and the UK releases advance Q2 GDP data. The RBNZ is set to decide on the overnight cash rate at 21:00 GMT. Overnight EURUSD traded 1.2054-1.2079 and USDJPY 70.08-78.23.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank