AUD Slips Further
The Australian dollar remains in focus for FX investors, with a further drop in iron ore prices putting the currency under renewed pressure. A series of domestic data prints were largely in line with expectations, Q2 GDP numbers came in at 0.6% q/q, 3.7% y/y vs 0.7%, 3.7% consensus. Asian equities were largely trading in the red at the time of writing, a feedthrough from the soft US data yesterday which led to a slight selloff in wider risk assets yesterday. The HSBC China services PMI was a touch softer at 52.0, falling from 53.1. There was better news in Europe yesterday however, with Spanish bonds rallying for a second consecutive day after a re-hash of Draghi’s comments that the ECB could buy sovereign bonds with maturities of up to three years. The 3y yields were down by 50bp while the 10y dropped by 28bp on Tuesday. The press conference following the meeting between French President Hollande and Italian Prime Minister Monti did not throw any surprises, keeping EURUSD in a tight range above 1.25. ECB Executive Board member Asmussen proposed that bank supervision by the ECB should be a “pre-condition for receiving ESM aid”. He added it is “unrealistic” to expect a supervisory mechanism for all banks to be in place by January 2013. The European Commission is expected to deliver its proposals for single banking supervisory authority next week. In the US, manufacturing ISM index came in soft at 49.6 against a consensus estimate of 50.0, with the employment component, new orders and export orders falling marginally. Notwithstanding the knee-jerk reaction, USD was largely unmoved by the weak report as markets remain focused on tomorrow’s ECB meeting and Friday’s payroll numbers. The BoC monetary policy meeting is due today. We expect the central bank to hold rates at 1.0% while maintaining its hawkish bias, despite relatively weak growth, employment and inflation numbers since its last meeting in July. Governor Carney recently noted that growth in Q3 may be slowed by “short-term special factors” and added that “modest withdrawal” of the stimulus may become appropriate. Considering that the housing sector is showing signs of cooling and the BoC expects inflation to rise to 2.0% only in 2013, we expect the central bank to remain on the sidelines this year. Also on tap today is Hollande’s meeting with EU President Van Rompuy.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank