RBNZ Unchanged
The RBNZ kept the OCR unchanged at 2.5% as widely expected, and also made no change to its essentially neutral policy stance. Accordingly our New Zealand economist sticks to his view that the policy rate will remain on hold until the March 2013 policy decision (when the first 25 bp hike is likely to be administered). There was no indication that a future OCR cut is under consideration and NZDUSD took some comfort from this eventually firming even further as the Asia session wore on in line with the stronger Australian dollar. The euro has managed to hold on to most of yesterday’s gains triggered by comments from the ECB’s Nowotny that “there are pro arguments” in favour of granting the ESM a banking license. Nowotny’s comments should not be taken entirely at face value however, as he was talking from a personal perspective and made it clear that he’s “not aware of specific discussions within the ECB at this point”. We would also note that Draghi has repeatedly rejected the idea, stating in December that the spirit of the Treaty (with respect to rules about state monetary financing) needs to be respected. In the last monthly press conference, he said acting outside of its mandate would destroy its credibility (we are due to hear more from Draghi today). Nonetheless, Nowotny’s remarks stand out as the first time an ECB member has stated explicitly that this could be a policy option, and with Spanish 10yr yields seemingly finding a home above 7%, markets are looking for any hints of a concession ahead of the August 2 ECB meeting. Adding to the pressure on the authorities are signs of further macro weakness in the core, the latest in the form of Germany’s July IFO survey, which revealed hefty declines in both the current assessment (to 111.6 from 113.9) and expectations (to 95.6 from 97.2) indexes – consistent with our view that the slowdown in the periphery is affecting growth in the core.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank