RBA Surprises, Stays On Hold
The RBA kept the policy rate unchanged at 3.25% overnight, surprising a majority of Bloomberg-surveyed economists who had been looking for a 25 bp cut. The rates market was evenly divided going in to the announcement, so the decision was always likely to inject some life into AUDUSD whatever the outcome. Ultimately, AUDUSD climbed 70 pips and still looks firm at the time of writing. Elsewhere, activity was predictably subdued ahead of the US Presidential Election, which remains too close to call. From an FX perspective, an Obama victory could trigger an initial pullback in USD, which appears to have garnered some support from hopes of a more growth-supportive backdrop under a Romney win – not to mention the sense that the market may start to question the ‘credibility’ of the Fed’s forward rate guidance beyond January 2014, when Bernanke’s term expires. The more pressing post-election issue will be whether the two parties can forge quick agreements on the ‘fiscal cliff’ and debt ceiling. This effort could be compromised in the event (i) Romney wins the popular vote, but falls short in the Electoral College; or (ii) neither candidate attains the required 270 electoral votes to be declared President, raising the unusual spectre of a President chosen by the House and a Vice President by the Senate. Yes, a Romney-Biden result is not totally out of the question. The threat of partisan politics and policy gridlock in Washington could work against USD in the first instance, but this may turn into a broader risk-negative factor that would ultimately benefit such ‘liability currencies’ like USD (and JPY) to the extent we get to the edge of the cliff without a deal and US recession fears take hold. Results should start flowing in from 19:00 ET, and if all the state votes are decisive, a winner may be declared around 23:00 ET. In the interim, investors will be digesting any news out of Greece ahead of Wednesday’s critical vote on the austerity package. Reports suggest that a troika deal is still likely to be reached this month, but not necessarily in time for the November 12 Eurogroup meeting as hoped.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank