Risk FX Holds Steady in Pre-Holiday Trade

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Market Drivers July 3, 2012
RBA keeps rates on hold
EZ PPI much weaker, UK Construction PMI plunges below 50
Nikkei up 0.70% Europe up 0.42%
Oil $84/bbl
Gold $1610/oz.

Asia and Europe:
AUD RBA Rate Decision no change
AUD Building Approvals 27.3% vs. 5.1%
JPY Labor Cash Earnings -0.8% vs. 0.6%
NZD ANZ Commodity Price -2.4% vs. -4.2%
EUR Eurozone PPI -0.5% vs. -0.2%
GBP PMI Construction 48.2 vs. 53.1
GBP Net Consumer Credit 1.3B vs. 1.1B
GBP Mortgage Approvals 51K

North America:
USD Factory Orders 10:00

An extremely quiet night of trade in the FX market with most of the majors hugging to their very narrow ranges in morning European session as newsflow remains non-existent and markets are happy to tread water until the ECB meeting on Thursday. In Australia the RBA, as expected kept rates on hold, noting that monetary policy was “appropriate” for the time being.

The RBA stated that while the housing market remains “subdued” labor conditions “firmed a little, notwithstanding job shedding in some industries; the rate of unemployment remains low.” Despite the cautious assessment of housing, today’s data showed that Building Approvals soared in the month of June rising by 27.3% versus 5.1% eyed.

Overall the RBA appeared to be content with the current state of monetary policy and may continue to keep rates on hold for the foreseeable future. Conditions in the Australian economy remain near equilibrium levels and unless global demand and more especially growth in China weakens materially the RBA is unlikely to ease further after having cut rates by 125 basis points since last November.

The Australian dollar saw little reaction to the news but remained generally well bid in Asian and early European trade holding near the top if its range at 1.0265. As the threat of further rate cuts by the RBA appears to have eased, the Aussie is beginning to reclaim its status as king of the carry trade amongst the majors and therefore could rally further towards the 1.0300 level if risk flows prove supportive as the day proceeds.

In UK the housing data was abysmal with Construction PMI printing at 48.2 vs. 53.1 eyed. This was the first contraction in housing in nearly two years and speaks volumes about the UK housing sector which remains mired at very low levels of activity. In addition to the dour news on the economic front UK traders were also rocked by the announcement that Barclay’s CEO Bob Diamond has resigned as a result of the LIBOR fixing scandal, but the news had very little impact on UK assets with shares of the bank actually rising today. Still cable is somewhat weaker against the euro today, although for the most part currency traders are ignoring the news, focusing instead on the prospect of further monetary stimulus from the BOE in the form of additional Asset Purchases.

Monetary easing is also on the minds of EURUSD traders as markets await the ECB rate decision on Thursday. Today’s very weak EU PPI data which printed at -0.5% vs. -0.2% provides the European central bank with plenty of ammunition to lower rates further as price pressures in the region are not only non-existent but are actually turning negative threatening the prospect of deflation.
In North America the calendar is barren ahead of the July 4th holiday with only Factory orders on the docket. With little newsflow for the rest for the day the markets may continue their quiet summer trade as everyone positions for Thursday’s marquee events including BOE and ECB meeting and US ISM Services report. For now quite trade continues.

Boris Schlossberg
Managing Director

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