Short Covering Assist Euro To Rebound Ahead Of G7; RBA In Focus | June 5, 2012

Risk currencies reluctantly clawed back losses overnight headed up by moderate gains from the Euro. In economic news, Euro-Zone producer prices were flat in April against an expected rise of 0.2 percent. The inflation indicator showed a steep annual fall to 2.6 percent from a revised 3.5 percent in March. Adding to Friday’s less than inspiring jobs and manufacturing data, U.S factory orders slumped 0.6 percent in April led by a 2.1 percent drop in core capital goods. Economists had anticipated a moderate rise of 0.2 percent.

Following on from Friday, the latest soft patch in U.S data is a primary driver of greenback demand with quantitative easing expectations promoting USD weakness, assisting the Euro to regain ground; nevertheless we consider a move higher across commodity bloc currencies and the Euro more of a case of short covering rather than a material shift in sentiment. There’s also some speculation European leaders may take further measures to combat the latest downward rout in an emergency G-7 meeting scheduled for this evening.
The Australian dollar has returned above the 97-handle once after falling to 8-month lows on Friday. The local unit rose to highs of 97.47 US cents alongside the Euro which is currently testing $US1.25-figure despite noise from ratings agency S&P saying Greece as a one-in-three chance of leaving the Euro-Zone.

Local markets are bracing for a big day of event risk to govern Aussie dollar movements with the RBA Rate decision headlining at 14:30 AEST. In short, markets consider a 0.25 percent cut a certainty, with growing calls for a second consecutive 0.50 percent cut. With this easing bias in place, the Australian dollar is at a prime vantage point to make a short and sharp shift to the upside should the RBA fail to deliver. While it’s clear subdued inflationary pressures have afforded the RBA ample breathing space to ease monetary policy, the question remains; does the board consider deterioration so great a 50bps cut is required to step ahead of the curve? Whatever the result, Stevens and Co have a lot to mull over and Tuesday’s policy decision at the very least promises to induce significant volatility from the local unit. Earlier this morning we have the AIG performance of services index, current account balance and net exports of GDP. HSBC will also release PMI services data this afternoon.