RBA Reveals Central Bank Buying
The RBA minutes from the August policy meeting were the highlight of the overnight session in Asia. The RBA again referred to the unusual strength of the Australian dollar which persists despite the weakening global outlook and the falloff in commodity prices. Again the currency’s strength was attributed to foreign buying of Australian bonds, but this time the RBA made specific mention of purchases of a “modest amount” of AUD by the Swiss National Bank. The minutes implied these purchases were a consequence of diversification activity related to the SNB’s efforts to maintain the floor in EURCHF at 1.20. AUDUSD advanced modestly on the headlines but failed to break above 1.05. Meanwhile, the RBA remains in wait-and-see mode as the effects of previous rate cuts continue to percolate through the economy. Attention now shifts to Governor Stevens’ semi-annual parliamentary testimony on August 24, especially in the wake of the Treasury’s comments last week highlighting the strength of the currency. We very much doubt the RBA is poised to intervene in the currency markets, and if the tightening impact of a strong currency eventually becomes too severe the bank is far more likely to respond with rate cuts rather than a round of FX intervention. Elsewhere, market pressure on sovereign debt markets in Europe’s periphery continues to ease. Spanish 10y yields fell back to a 7-week low yesterday. The ECB’s next policy decision on Sept. 6 is still a long way off, but ECB President Draghi is due to address the Jackson Hole conference on Sept 1, and this could be an opportunity to update the market on his plans for the ECB’s new breed of open market operations − which he first outlined almost three weeks ago. In the meantime, newswires are likely to carry claim and counter-claim about what exactly the ECB has in mind, and this will likely lead to jumpy trading conditions for the euro ahead.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank