RBA Cuts 25bp
In line with expectations, the RBA cut the cash rate by 25bps overnight. The central bank noted weakness in Europe and China as the principal drivers but did point towards some domestic indicators such as the labour market stabilizing. The Q1 c/a deficit came in at AUD 14.9bn, as expected with net exports taking 0.5% off GDP. AUD traded in a volatile fashion – dropping to 0.9715 before quickly rebounding back to 0.9790, as risk assets rallied in general. Stocks in Asia rose for the first time in 5 days, the RBA decision will fuel hopes that a bout of stimulus will be forthcoming from other central banks. The G7 will today hold a conference call, though any major announcements are unlikely just yet. With limited negative newsflow from the Eurozone, the euro was able to continue its grind higher, as shorts were covered amid hopes that a pan-European roadmap towards a banking union would emerge in coming weeks. Gains in Spanish and Italian equity markets yesterday were also euro-supportive even though Merkel and Barroso said EU banking supervision will be “discussed” at the next EU Summit, but specifics were predictably lacking. While S&P published a report ascribing a one-in-three chance of Greece exiting the euro, there was little market reaction, with concerns about adverse spillover effects tempered by S&P’s assertion “that other sovereigns would be unlikely to follow any Greek exit”. GBPUSD brushed off the UK ratings downgrade by Egan-Jones to AA- from AA in thin conditions exacerbated by the UK holiday. Danmarks Nationalbank confirmed that reserves rose to a record high of DKK502.4 bn in May, with FX intervention amounting to DKK29.6 bn, the heaviest tally since May 2010. As for the SNB, the latest sight deposit data showed an increase of about CHF34 bn during the last few weeks, on the low side of market expectations, but this may be distorted by FX swap operations. Thursday’s May reserve number will provide a clearer indication of the degree of SNB activity. Today’s second-tier US data were soft (May New York ISM down to 49.9 in May; April factory orders down 0.6% m/m), but failed to move USDJPY in a market already looking ahead to Thursday’s Bernanke testimony. USDJPY bears are also leery of rate checks or covert intervention by the Japanese authorities, with Japan’s Vice Finance Minister Nakao noting an exchange of views with BoJ Executive Director Nakaso today. Today’s rate RBA rate cut is unlikely to be matched by the BoC, who remain one of the least dovish central banks in the G10 space, although developments overseas are likely to lead to a somewhat cautious tone.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank