Australia Holds Interest Rates at 4.5 Percent, Hints Tightening Over

Key Overnight Developments

• RBA Holds Interest Rates at 4.5 Percent, Hints Tightening Over
• Australian Manufacturing, Building Permits Data Disappointing

Critical Levels



The Euro and the British Pound declined against the US Dollar as stocks sold off in Asian trade, boosting safety-linked demand for the greenback. We remain short EURUSD at 1.4881.

Asia Session Highlights



The Reserve Bank of Australia kept benchmark interest rates unchanged at 4.5 percent as expected. RBA Governor Glenn Stevens issued a decidedly dovish statement following the announcement, saying borrowing costs are now “around their average levels of the past decade [having undergone] a significant adjustment,” which the bank sees as “appropriate for the near term.” Stevens went on to say that conditions in Europe will probably continue to be “relatively weak” while growth in Asia “may need to moderate in the year ahead” but adding that the recovery in North America is becoming “more established”. Indeed, as we have previously argued, with China proactively slowing its economy amid fears of asset bubbles and runaway inflation and European growth hamstrung by rising borrowing costs linked to bailing out spendthrift EU members, the fate of the global rebound has fallen on the shoulders of its last remaining engine – the United States.

Elsewhere on the calendar, the AiG Performance of Manufacturing Index fell to 56.3 in May, marking the largest slowdown in the pace of the sector’s expansion in 15 months, with sharp draw-downs on indexes tracking new orders, inventories and deliveries. AiG chief executive office Heather Ridout said she saw “worrying signs of weakness among the consumer-related sub-sectors of the industry,” which she mostly attributed to “the cumulative impact of six [RBA] rate rises”. Building Approvals also floundered, down 14.8 percent in April, with the outcome likewise linked to higher borrowing costs.

Euro Session: What to Expect



Swiss Gross Domestic Product is set to add 0.7 percent for the second consecutive quarter in the three months through March, marking the first time in a year that economic growth did not accelerate. Meanwhile, the SVME-PMI gauge of manufacturing activity is expected to decline to 64.7 in May, marking the first slowdown in the pace of the sector’s growth in five months. The outcomes may prove to underscore Switzerland’s fading prospects amid expectations that its chief export market – the European Union – faces a prolonged period of lackluster growth.

German Unemployment is expected to decline for the eleventh consecutive month, down 17,000 in May. The Unemployment Rate is forecast to hold unchanged at 7.8 percent. While this is a broadly positive outcome, currency traders are sure to take it with a grain of salt. Indeed, an increase in hiring is typically supportive for a given currency in that it foreshadows a pickup in consumption and economic growth, which ultimately feeds expectations of building inflation pressure and higher interest rates. However, this is clearly not the case in Europe as the European Central Bank is far from being in a position to tighten policy given the sovereign credit meltdown on its southern periphery. In fact, the central bank moved ahead with its own version of quantitative easing in early May, which has in and of itself added to the ECB’s paralysis, feeding public bickering between hawkish policymakers like the Germany’s Axel Weber and bank president Jean-Claude Trichet.

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