RBA On Hold
The RBA held its policy rate at 3.50% overnight, in line with market expectations. The Reserve Bank noted that inflation was expected to be consistent with the target and growth close to trend. Despite a more subdued international outlook than a few months ago, policymakers noted the ‘stance of monetary policy’ was appropriate. After a few wobbles in Q2 policy expectations have improved markedly and this is now being reflected in price action and market positioning. We continue to be cautious about adding to fresh longs in risk currencies around current levels, but the comments by the RBA are broadly consistent with expectations in many such economies heading into Q3. Our economists now expect the RBA to hold the cash rate at 3.5% until 2013. In an environment where the G5 central banks are maintaining a trend of increasing accommodation and zero rates, yield flows will likely continue, not to mention AAA demand adding to the interest. It appears that the two key risk factors for markets – Eurozone crisis and a global slowdown – have subsided for now but we would not call time on either for the remainder of the year. Positioning remains heavy in EUR amongst real money, suggesting very little expectation of a structural solution in the immediate future, and any return to volatile markets will likely affect global sentiment, which has been flagged throughout global policy meetings. As such, we stick to our current short- and medium-term forecasts in EURUSD, and especially await for the EUR to revert fully to funding status with the onset of more aggressive ECB policy. Overnight risk remained stable with EURUSD trading in a range of 1.2385-1.2406 and USDJY 78.17-78.29. Ahead today, industrial production figures are due in Norway and the UK, with UK figures in particular expected to show further contraction in output as the BoE maintains or even increases accommodation in the coming months. Fed Chairman Bernanke is also due to speak. Overnight Dallas Fed’s Fisher, a known hawk, warned that more easing won’t be effective, and exiting could be more difficult given the political calendar could complicate proceedings.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank