RBA melt up - A$ forges gains despite rate cut
The Australian dollar held onto gains overnight following yesterday's rally after the Reserve Bank cut interest rates by 25bps - equaling the all-time low of 3-percent set in April of 2009. Markets had been well-and-truly short leading into the decision with investors suitably pricing in a 25bps cut. This surplus of speculative shorts led to a squeeze in the ensuing period. With inflation consistent with the bank's target range, the board judged that domestic conditions warrant further easing, while noting the full effects of earlier cash rate reductions have yet to be fully observed. We believe this to be a form of insurance due to what could be an elongated period of uncertainty given the events in the US, namely the fiscal cliff. From a currency perspective, short players were flushed out and the momentum encouraged further buying with traders operating under the assumption this could be the last in a series of cuts. At this juncture we believe this assumption is correct, with the bank likely to sit on their hands in February's meeting and through the early part of next year.
The Aussie led a risk currency offensive overnight, with the kiwi the beneficiary of residual support from the Aussie, while the CAD responded in kind after the Bank of Canada maintained their tightening bias, holding interest rates at 1-percent overnight. Meanwhile, the US dollar failed to reflect the moderately negative tone spilling over from US markets, with fiscal cliff negations remaining the primary barometer of sentiment. The greenback lost further ground against the Euro and consolidated recent gains against the Japanese Yen, with little in the way of feedback from Japan to keep the USDJPY upside momentum alive.
The day ahead will see the local unit take direction from third-quarter GDP, which is expected to show the local economy grew 0.6 percent or 3.1 percent in annual terms, down from 3.7 percent in the second quarter. Also in the frame is the HSBC China services PMI scheduled for release at 12:45 AEDT.
Fiscal cliff negotiations command the spotlight
Markets remained transfixed on the political jousting between Obama's Democrats and Republicans over the year-end tax hikes and spending cuts. A proposal by the Obama camp calling for tax hikes to the tune of $US1.6 trillion, was met with a counter-proposal by Republicans to save $US2.2 trillion using a mix of tax reforms, medicare and spending cuts. Still, there appears to be an element of blind faith holding markets at bay. While it's generally thought negotiations will be go down to the wire, expectations of some sort of consensus between the warring parties have kept markets from a deeper trough, with markets - at the very least - anticipating a 'stop gap' solution, ironically reminiscent of the debt ceiling negotiations of 2011. While we may not be seeing a strong emotional reaction from markets, it remains a key stumbling block for broader sentiment, in turn likely to cap the upside until material signs of progress are apparent.
Euro breaks $1.31
The good news kept on flowing for the Euro overnight, testing the $US1.31-figure for the first time since mid October. After what feels like of lifetime of pain over Greece's economic fortunes, the latest deal carved out with the troika appears to be a game change...for now. A poor fundamental outlook from both the periphery and flagship economies, appear to be superseded by relative stability in Greece, with markets responding in kind to Greece's debt buyback scheme. In an effort to reduce their private creditor debt burden, the Public Debt Management Agency offered a maximum purchase price of 34.1 percent for bonds maturing between 2023 and 2042, with the tender to be concluded by December 7 with a total outlay of 10-billion euro's. The euro is currently looking solid at $US1.31-figure but the 'good news' factor is wearing thin and we consider a period of consolidation the most likely scenario.