RBA cuts, but Aussie still more sensitive to risk picture

More John J Hardy, 4 days ago06 December 2011 Non-Independent Investment Research Aussie on the ropes a bit, though the market seems to only see the currency through risk appetite glasses. Those may bet getting blurry and we wonder if there is still far too much complacency Down Under.

After getting off to a positive start, the US session ended yesterday on a sour note as the S&P bond ratings agency announced that it was putting 15 of the 17 Euro area countries under negative review and would likely downgrade if a credible plan is not introduced to deal with the sovereign debt crisis. That the market reacted as strongly as it did was more of a sign that the market had gone too far in the nearest term in pricing in a rosy outcome of this Friday’s EU summit than it was a recognition of the importance of the announcement.

Earlier in the day, Sarkozy and Merkel’s statements on new changes to the EU treaty set off quite a positive reaction, one that was a bit befuddling as it appeared to be very much in line with the expectations building ahead of Friday. At the same time, the exclusion of Euro Bonds was a negative (for the rally-via-liquidity argument) and Sarkozy’s refusal to talk about the ECB’s role in all of this underlines the ongoing uncertainty. The commitment to budget austerity is all well and good, but doesn’t relieve. What has relieved the pressure on the banking system was yesterday’s very dramatic tightening in sovereign debt spreads across Europe. Italian 2-year yields have dropped close to 5.5% today after hitting 8% last week. 

RBA cuts
The RBA statement was very balanced, considering many of the developments abroad. A continued need for easing was flagged and the December ’12 Australian STIR future perked up about 11 ticks, taking back about half of recent losses, so some additional expectation of policy easing going forward was priced back in. But considering the limp to the finish in New York late yesterday and weak Asian markets in today’s session, the move lower in the Aussie was positively sedate. The RBA seems to want to refuse to set off any alarm bells. Mr. Stevens statement, for example merely noted that Chinese growth has slowed “as policymakers intended” and, while a number of external risks related to Europe were outlined, concern on the domestic front remained fairly light. 

Robust investment and activity was noted in the resources extraction sector, while softness was noted in non-mining sectors of the economy. Inflation was forecasted to remain in the 2-3% range in the coming two years. By all appearances, the RBA and the market are looking for a very soft landing indeed, and no mention was made on the risks from the Australian housing bubble. Complacency is a word that comes to mind after this statement, though the market needs to move AUDUSD back below 1.00 to suggest that the complacency will be challenged in the near term.

Chart: AUDUSD
Lines in the sand abound for AUDUSD and risk appetite. In the latter, we’re watching as the US S&P500 flirts with its 200-day moving average (around 1265 on the cash index), which has been a key resistance level since it was broken back in early August. As for AUDUSD, the furious rally off the lows has paused here ahead of its 200-day moving average at around 1.0330. The 1.0085 are was an interesting pivot area of interest recently and could remain a focus, though the obvious psychological battlefront takes place at the parity level.