Australia Holds Interest Rates, US Dollar Falls on Rebound in Risk Appetite

Key Overnight Developments

• RBA Keeps Rates Unchanged, Reinforces Neutral Bias Going Forward
• Australian Trade Surplus Tops Forecasts on Sharp Rise in Gold Exports
• US Dollar Declines as Risk Appetite Firms, Stocks Rise in Asian Trade

Critical Levels



The Euro and the British Pound rose 0.3 and 0.4 percent respectively against the US Dollar as stocks advanced in overnight trade, sapping demand for the safety-linked greenback. The MSCI Asia Pacific regional benchmark equity index added 1.1 percent after prices fell to the lowest level since December 2008 relative to expected earnings, with cheaper valuations apparently spurring bargain-hunting. We remain flat EURUSD and GBPUSD.

Asia Session Highlights



The Reserve Bank of Australia kept interest rates unchanged at 4.50 percent as expected. RBA Governor Glenn Stevens said the current setting is “appropriate” with effective borrowing costs are “around their average levels” and underlying inflation “likely to be in the upper half of the target zone over the next year” despite a likely short-term move above 3 percent in the near term (an uptick chalked up to rising tobacco taxes and higher utility prices). Stevens added that the international economic landscape looks uncertain in the year ahead, with Europe hamstrung by “budgetary constraints…and the pressure on euro area banks” while Chinese economic growth is “starting to moderate”. Markets continue to bet on no changes in benchmark interest rates over the next 12 months according to a Credit Suisse gauge of priced-in expectations.

Separately, Australia’s Trade Balance surplus soared to A$1.7 billion in May – the highest 14 months – as exports soared 6 percent from the previous month, driven by a hefty 66 percent (A$772 million) increase in non-monetary gold shipments. Fittingly, spot gold prices overcame the December 2009 top to set a new record high in May and would rise further still in June. However, as we noted in our long-term gold forecast, the metal’s ten-year rally looks decidedly vulnerable, meaning its ability to boost Australian terms of trade is likely limited beyond the immediate future.

Euro Session: What to Expect



The economic calendar looks uneventful in European hours, with risk sentiment likely to remain as the dominant driver of currency market price action. European and US equity index futures are trading higher, up 0.5 and 0.2 percent respectively in late Asian trade, hinting most major currencies are likely to remain firm against the safety-linked US Dollar and Japanese Yen.

Switzerland’s Consumer Price Index figures amount to the only noteworthy bit of scheduled event risk, with expectations calling for the annualized inflation rate to decline for the second month to 0.9 percent in June. A slowdown seems reasonable considering the downward pressure on economic growth from the turmoil in the European Union, Switzerland’s largest trading partner claiming over 60 percent of overseas demand. The degree to which the downturn in the common market renews deflation fears in the mountain nation remains uncertain, but a largely sanguine Swiss National Bank is likely to keep today’s outcome from being particularly market-moving. Indeed, the central bank said just three weeks ago that the “deflationary risk in Switzerland has largely disappeared”. That said, policymakers left themselves a bit of wiggle room, adding that if current “downside risks” from the turmoil in the EU materialize “via an appreciation of the Swiss Franc [and] “lead to a renewed threat of deflation,” the SNB would “take all the measures necessary to ensure price stability,” meaning renewed intervention in FX markets is not out of the question.


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