– RBA’s 25bp rate cut today failed to reverse the bullish AUD trend; we stay long AUDUSD
The RBA cut its cash rate by 25 bp to 3.00% as widely expected. In line with our call, the dips in AUDUSD post-RBA was very brief (a mere 10 pips to 1.0408) as the market has already priced in a 90% probability of a rate cut. The fairly neutral statement with little dovish hints of further rate cuts saw AUDUSD rebound to a high of 1.0460. As a justification for today’s cut, the RBA stated that the full effects of earlier measures have yet to be observed; hence rate cut is appropriate to help foster sustainable growth in demand. In addition, RBA noted that while there are signs of easier conditions starting to have some of the expected effects, but the AUDUSD remains higher than might have been expected. On external outlook, global risk is seen to be on the downside, with Europe likely to remain the main source of instability, but US and Chinese growth has stabilised. Inflation is expected to stay within target for the next 1-2 years, with a softening labour market and higher unemployment. The AUD OIS is still pricing in about 45 bp of rate cuts till September 2013, but our economist call is for RBA to stay on pat for the first three quarters of next year. Further improvement in Chinese growth outlook could result in unwinding of rate cuts expectations, benefiting the AUD. A resumption of lower USDCNY fixings would also be bullish for AUD, and our expectation for CNY appreciation (6.02 end-2013) remains a key input to our bullish AUD view. We maintain an AUDUSD long trade recommendation entered at 1.0390, targeting a gain to 1.0850.
– US ISM hints at weaker payrolls, potiental ‘dead cross’ on DXY index suggests more downside in the USD
The USD remains heavy – the DXY index cracked below the 80.00 support, opening the next 79.50 trendline support. A potential dead cross formation on the daily chart (100-day MA cutting below 200-day MA) also warns of further downside risk for the USD, in line with our view. US November manufacturing ISM unexpectedly fell to 49.5, with the employment component also falling into ‘contraction’ territory at 48.4. It is probable that the data were impacted by the Hurricane Sandy as well as the fiscal-cliff uncertainty. The employment component of this report is consistent with our call for a well belowconsensus 25K reading in the November non-farm payrolls report on Friday. On Fed speaks, both Fed’s Bill Dudley and Eric Rosengren made dovish comments overnight, and we believe the Fed will deliver further easing on December 12. The key factor that could offer significant help to USD in the near term is the break-down of the fiscal-cliff talks. But our stance remains that we expect the initial part of the deal (i.e. postponing the fiscal tightening to allow broader fiscal talks) to be reached before the December 31 deadline.
– Eurozone sentiment continues to heal; stay long EURCHF
The EURUSD trades near a six-week high as eurozone risk sentiment continues to improve. From a technical standpoint, EURUSD closed above its bearish trendline resistance from the peak in May 2011 overnight, suggesting room for further upside gains. We expect EURUSD to rally to 1.3300 by year-end. Greece said yesterday that it will borrow EUR 10bn to finance the debt buybacks, which should lead to a net outstanding debt reduction of around EUR 20bn. A successful debt buyback should also open the path for the Troika to sign off on the final decision to disburse the next tranches of Greece’s loan on 13 December. Clearly, markets continue to scale back eurozone ‘tail risk’ with peripheral bond yields falling further. But this risk scale back is yet to be fully reflected in EURCHF. The cross rose on Monday on headlines suggesting Switzerland’s second largest bank will charge customers negative interest rates on cash balances. We believe that further improvement in eurozone sentiment will signal scope for more ‘catch up’ in EURCHF. We maintain our long EURCHF trade recommendation initiated at 1.2060, targeting 1.2500.
BNP Paribas