- RBA stands pat and signals further inaction – AUDUSD boosted…
Ahead of this morning’s RBA decision consensus was very much for a cut – and indeed money markets were pricing in multiple cuts over the coming two or three quarters, even if there was some debate over the timing. But not only did the RBA decline to cut at this meeting, the Statement suggested that, in the absense of a material weaking of demand, it is likely to be in ‘wait and see’ mode -and AUDUSD gained a big figure to a high of 1.0812. BNPP Economics have revised their call and now see no change in the Cash Rate through the end of the year. BNPP FX Strategy is clearly in the bullish AUD camp. Global liquidity and stronger than expected US growth add to the positive factors, as do the likely Chinese soft landing and increased LNG demand from Japan. The ECB’s 3-year LTRO has eased much of the stress in financial markets – which given Australia’s current account deficit is perhaps the greatest threat to continued AUD stability. Against this backdrop, we expect EURAUD to continue its trend lower; and we have raised our year-end AUDUSD forecast to 1.1500.
- …but further rally on hold until resolution of Greek impasse
But further gains for in AUDUSD – and indeed for the risk complex in general – are likely to have to wait for resolution on Greece. That the talks have dragged on this long – beyond any deadlines – is clearly worrying. However markets seem to be assuming that there will be no catastrophe, that common sense will prevail and that one side or other will blink.
Certainly the prospect of a disorderly Greek default should concentrate the minds of leaders both in Athens and elsewhere. This is not the place for a Rumsfeldian discussion of the potential costs involved, but there is plenty of food for thought in a potential collapse of the Greek banking system, the re-introduction of the drachma, the triggering of CDS and
the potential for contagion – into Portugal on fears of similar fear haircuts; to Eastern Europe through Greek banking links; and to other peripherals on weaker growth prospects. Surely then Germany and the Troika would not let Greece go? This is clearly the bet that Greece is making in delaying as long as it has. But the political calculation for German and ECB leaders weighs the unknown consequences of Greek default against the all-too-well-known consequences of fiscal and monetary indiscipline. Is it possible that German voters might prefer a couple of years of lower growth in order to preserve the long-term credibility of the EUR? It is hard to see how a meaningful risk rally can materialise against the backdrop of this particular game of chicken.
- Bernanke testifies before the Senate Budget Committee—Q&A will be important
On the data front, German IP should show a moderate increase in December production especially after the better-thanexpected factory orders on Monday. This should signal the end to the weakening of the data since August and provide a good basis for a more broad-based rebound at the beginning of 2012. Also today, Bernanke is scheduled to testify to the Senate Budget Committee. It is unlikely that his testimony will be any different from the House testimony on 2 February. However, the Q&A may be interesting as he may be asked about QE3 as well as what the latest jobs report has done to his outlook and expectations for further monetary accommodation.
BNP Paribas