Dollar Holds Gains
Overnight the dollar held onto most of Friday’s gains in the wake of the strong US employment data. AUDUSD was an exception however as it scrambled higher after: (1) a narrower than expected Australian trade deficit (2) a consensusbeating Australian retail sales report and (3) a pair of local newspaper articles indicating that an RBA rate cut on Tuesday is by no means a foregone conclusion. Headlines from the G20 meeting failed to inspire with Japan’s Finance Minister Jojima using the opportunity to trot out the well-worn Japanese position that yen strength is out of line with economic fundamentals and therefore poses risks to the domestic economy. BoJ Governor Shirakawa broke new ground however saying he expects US politicians to tackle the fiscal cliff issue swiftly after the US Presidential Election concludes. We are less optimistic on that front, and would not be surprised if many weeks of tough negotiations lie ahead before we ultimately arrive at a suitable compromise in time to avert a perfectly-preventable US recession. Elsewhere, Moody’s announced that the consequences of Hurricane Sandy will not affect the credit worthiness of the US sovereign. We continue to look for broad-based US dollar strength into next year given the US economy is likely to outperform many of its peers. Indeed it is telling that EURUSD fell back to a 5-week low overnight on this economic outperformance theme – and an escalation of the Eurozone sovereign debt crisis was not needed to drive EURUSD lower. Three G10 central bank policy meetings are due this week. Our economists expect both the ECB and the BoE to keep policy settings unchanged on Thursday. However, our Australian economics team looks for a 25bp ‘insurance’ cut to the RBA’s cash rate to avoid falling behind the curve, though this is a close call given the recent string of generally firmer global data and the seemingly high Q3 CPI. Note that 7 of the 27 respondents in the latest Bloomberg poll still expect no change, so any RBA action should weigh further on AUD.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank