RBA Primed to Ease
The latest set of RBA minutes were even more dovish than the policy statement indicated two weeks ago. Crucially, a key phrase made a reappearance for the first time since June – the board noted that “the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth”. This is consistent with the views of our Australian economics team who expect the RBA to deliver a further 50 bp of easing by year-end. Additionally, in the wake of these minutes, our economists now see an increased likelihood that the first 25 bp of easing could come as soon as the October meeting. Meanwhile Sino-Japanese tensions escalated another notch overnight over the ownership of islands in contested waters, although there has been little perceptible currency impact so far. In Europe meanwhile, Spanish 10y yields rose by about 20bp on Monday as concerns that Spain may not request EU aid grew. ECB Governing Council member Coene stated the obvious but this was enough to trigger some euro selling during the US session. He said that if “markets see that Spain will not” ask for an EU aid, “spreads will rise again” and reiterated that the ECB will not buy bonds unless the Spanish government makes a formal aid request. The Canadian international securities transactions report showed that foreign appetite for Canadian securities returned in July with net purchases of CAD6.7 bn, after divestments of CAD7.8 bn in June. USDCAD fell temporarily following the report but bounced back owing to USD strength across the board. The BoJ will start its two-day policy meeting today. Our economists expect the central bank to stand pat this week and see next month, when the BoJ releases its inflation projections, as a better time to provide further stimulus. Also on tap today are the Riksbank minutes, UK August CPI data and German ZEW survey.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank