RBA On Hold For Now
AUD was the stand-out performer overnight, breaking through 1.08 as the RBA surprised investors and left its cash rate on hold at 4.25%.. There was a unanimous consensus for a 25bp cut so the move was very surprising. The board noted that policy was appropriate “for the moment”. This suggests the bank still has an easing bias and will “adjust the cash rate as necessary to foster sustainable growth and low inflation”. Our Australian economists continue to see a modest trimming of the cash rate over the coming months given the continued uncertainty around Greece, mixed domestic data and the high AUD. The currency is now at stretched levels and we would look to fade any move higher from here, in fact on Monday we entered a trade recommendation to go short AUD via a 3m AUD put /USD call option, taking advantage of the recent decline in volatility. The news wires were quiet on Greece overnight and 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. Today, industrial production data out of Germany is 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. Overnight EURUSD traded 1.3089-1.3141 and USDJPY 76.50-76.79.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank