Euro Holds Ground as Aussie Trips

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Major driver October 2, 2012
RBA cuts rates by 25bp on fears over global growth
UK PMI Construction misses as it dips below 50
Nikkei off -0.12% Europe -0.09%
Oil $92.50/bbl
Gold $1781/oz.

Europe and Asia:
AUD RBA Rate Decision – 25 bp cut
JPY Labor Cash Earnings 0.2% vs. -0.9%
EUR Eurozone PPI
GBP Purchasing Manager Index Construction 49.5 vs. 50
GBP Nationwide House Prices -0.4% vs. 0.1%

North America:

The EUR/USD hovered near the 1.2900 level in quiet European morning trade while Aussie tumbled through the 1.0300 level in the wake of a 25 basis point cut by the RBA. The RBA lowered its benchmark 3.25% citing downside risks to the global environment. The market had priced in an 80% possibility of a rate cut, but the news nevertheless had an instantly negative impact on the currency pair as traders zeroed in on RBA decidedly more cautious tone.

The RBA noted that, “Economic activity in Europe is contracting, while growth in the United States remains modest. Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.”

The slowdown in global demand has yet to seriously impact the Australian economy, which the RBA observed, is “running close to trend, led by very large increases in capital spending in the resources sector.” However, the Australian monetary authorities are clearly worried that growth may begin to slow materially into the year end as troubles in Europe and Asia persist. Furthermore, the absence of an inflation pressures in the system has clearly allowed the RBA to assume a more accommodative stance on monetary policy as authorities attempt to be more proactive in anticipating the possible slowdown in demand.

Overall, today’s RBA statement clearly shows that policymakers are no longer neutral in their assessment of risks to the Australian economy and could move to lower rates further should conditions deteriorate into the year end. One key factor that may have particular effect on RBA’s decision to cut rates is the ongoing strength of the Australian dollar. With export demand softening the RBA members may have been concerned about the negative impact of a strong Aussie on trade. Therefore, given the lack of any upside risks, the monetary authorities in Sydney may not be averse to further cuts in the interest rate before the year end as they try to guide the AUD/USD towards parity in order to promote more trade.

Meanwhile in Europe the conditions remained at status quo with little fresh economic data on the docket. Spanish unemployment rose once again as it approached the 25% mark and yesterday’s unconfirmed reports that Spain was ready to ask for a bailout continued to swirl in the market. although authorities have given no formal indication that they were willing to do so. The EURUSD continues to hold the 1.2800 figure on assumption that policymakers will act soon and that conditions in the region will continue to stabilize, but we believe that the slowdown in Europe may accelerate as Germany faces much tougher exports markets going forward and that in turn could send EUR/USD down to 1.2500 in the foreseeable future.

Finally, UK Construction PMI missed its forecasts printing at 49.5 versus 50 eyed. This was the 2nd PMI report to show disappointing results and if tomorrow’s services PMI prints weaker than expected as well then cable could be vulnerable to a selloff towards the 1.6000 level as traders reassess the prospects for UK growth into the year end.

In North America today only the new vehicle sales report on the calendar today so trading may continue to be rangebound most of the day, with currencies likely taking their cues from equities as markets await further resolution of events in Europe.

Boris Schlossberg
Managing Director

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