RBA Expected to Cut
The RBA decision is the key event for the Asia session. The market expects a 25bp cut to 4% but only one more followup in June, as opposed to the additional 100bp over the next 12m currently priced.. As much as the market remains tentative on the AUD and the commodity bloc in general, current conditions may yet prove conducive for such assets to recover merely on a tactical basis. Positioning is relatively light, and growth expectations have generally come down, which provides more scope for surprises to the upside. Another drag on the AUD may also be US monetary policy – which appears to be going nowhere but that in itself is enough to deter anti-debasement trades, which have benefitted the AUD throughout the last few years. Nonetheless, we don’t see any material breakthrough in the AUD barring a turnaround by the RBA. Given the external risks at this stage and the weaker Q1 CPI report, this is somewhat harder to envisage.. Elsewhere, risk traded on a weak tone throughout Monday, though activity was light as most key Asian markets were on holiday. The broader trend for risk appetite is still mixed as there is simply a lack of market participants seeking to express a view, especially if they risk being stopped out by policy responses. For the Eurozone, it is a question of political divergence which threatens the fiscal compact, but trading off this theme appears a thankless task, and the surprisingly buoyancy in corporate earnings is also severing as a deterrent to fresh shorts. We believe structural deficiencies are hard to counter when a major shock arises, but again, we do not detect any interest in these positions for the time being. Otherwise, on Tuesday manufacturing ISM is the key release and we are slightly above consensus in looking for a 53.5 release. The UK will release its own figures for manufacturing sentiment, while BoC’s Carney will likely continue his assertive views on the Canadian economy. EURUSD traded 1.3209-1.3266 and USDJPY 79.74-80.38.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank