RBA Decision Due
The EUR managed to recover some lost ground during the US session but the commentary from the Eurozone remains rather gloomy. After talks, German Chancellor Merkel and French President Sarkozy both expressed frustration with the state of PSI and troika talks on Greece, as the Greek PM had to postpone domestic talks on reform to meet the troika’s demands. EU leaders have expressed dismay at the slow pace of implementing changes, but also expressed the view that allowing Greece to default or exit the Eurozone would also be unacceptable. The focus on Tuesday will be on final headlines from domestic parties in Greece and the various agreements made to obtain support for further troika funding. Details for the PSI and OSI will also be sought, but the IIF and Greece have missed so many deadlines over the past few weeks that markets are not particularly attuned to fresh news on this front, given the mathematics involved have been communicated in advance. On the policy front, the RBA decision is due and we expect a 25bp cut to 4.00%, in line with the rest of the market. However, the OIS market is still pricing in more than three cuts over the next 12 months, which seems excessive. Our economists expect the cash rate to be left at 4% for the remainder of the year, and the RBA will likely communicate a more optimistic view on the economy up ahead. Industrial production data out of Germany is also due, while policymaker commentary by Thomas Jordan may attract some attention, particularly after his comments last week reaffirming the central bank’s resolve in defending the Eurozone. Fed Chairman Bernanke’s testimony to the Senate Budget Committee should not differ from his House testimony, though a more upbeat tone can be expected in the wake of the latest unemployment report. We continue to target EURUSD lower, and on Monday entered a trade recommendation to go short AUD via a 3m AUD put /USD call option, taking advantage of the recent decline in volatility. EURUSD traded 1.3029-1.3141 and USDJPY 76.50-76.79.
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UBS Investment Bank