The Reserve Bank of Australia validated market expectations by cutting benchmark interest rates by 25 basis points, bringing borrowing costs to 7.00%. Meanwhile, Building Approvals fell -2.3% in July, sharply underperforming expectations of a 0.5% monthly increase. Forex traders will focus on Euro Zone Producer Prices in European trading. The metric is expected to print at the highest in over 20 years and may impact the market’s expectations for the timing of an ECB interest rate cut.
[B][U]Key Overnight Developments[/U]
• Oil falls to $111/barrel as worries recede about hurricane Gustav
• Reserve Bank of Australia cuts interest rates to 7.00% as expected[/B]
[U][B]Critical Levels[/B][/U]
The Euro remained under steady selling pressure overnight, losing its grip on the 1.46 level. DailyFX Senior Currency Strategist Jamie Saettele expects the Euro to correct to 1.4908 before the down trend resumes. Near-term support is seen at 1.4557, with resistance at 1.4696. Sterling continued its decline, testing below 1.7850. Support is found at 1.7815, with resistance at 1.8113.
[U][B]Asia Session Highlights[/B][/U]
The [B]Reserve Bank of Australia[/B] validated market expectations by cutting benchmark interest rates by 25 basis points, bringing borrowing costs to 7.00%. RBA Governor Glenn Stevens said that “it is looking more likely that household demand will remain subdued and overall economic growth slow over the period ahead.” Stevens added that while headline inflation is expected to remain elevated in the near term, the long-run outlook for demand “suggests that inflation in both CPI and underlying terms is likely to decline over time.” The RBA chief concluded that “there was now scope for monetary policy to become less restrictive.” However, the RBA erred on the side of caution and did not give indication of whether today’s rate cut was the beginning of a longer easing cycle. The move had been widely forecast and the Australian dollar did not react forcefully to the announcement.
Australian [B]Building Approvals[/B] fell -2.3% in July, sharply underperforming expectations of a 0.5% monthly increase. HIA Home Sales collapsed -7.2% in July as high borrowing discouraged Australians from buying real estate. The dampening effect of higher benchmark borrowing costs have been compounded by the global credit crunch: the antipodean nation’s five largest lenders raised mortgage rates by an average of 105 basis points so far this year.
[U][B]Euro Session: What to Expect[/B][/U]
[B]Switzerland’s Gross Domestic Product[/B] is expected to have grown at 2.4% in the second quarter, a slower pace than the 3.0% recorded in the first three months of the year. The reading would mean that the pace of economic growth has fallen -35.5% in 2008 after reaching a 7-year high in the forth quarter of last year. External demand for Swiss goods is under pressure as the mountain nation counts on the beleaguered economies of the EU to absorb 60% of its exports. Domestic demand is also loosing its ability to support growth as Retail Sales printed at a very modest 0.7% in June versus 7.4% in the preceding month.
In a separate report, [B]Swiss Consumer Prices[/B] are expected to issue the second consecutive monthly decline, printing at -0.1% in August having contracted -0.4% in July. Annualized inflation is expected to remain at 3.1%. This is good news for the Swiss National Bank: the disinflationary effects of a slowing economy into the second half of the year are a vital assumption in the SNB’s decision to keep interest rates on hold. Indeed, the market is pricing in for borrowing costs to remain unchanged at 2.75% at least until the end of 2009.
Meanwhile, [B]Euro Zone Producer Prices[/B] are expected to rise 1.2% in July, bringing the annualized growth rate to 9.1%, the highest in at least 24 years. The release is likely to mirror Germany’s July Producer Price Index, which shot up to a 27-year high at 8.9% from 6.7% in June. Higher energy prices accounted for the bulk of the uptick. Although crude oil had fallen close to 20% in July, firms typically establish contracts with suppliers to fix the purchase price of energy at least several months in advance to avoid volatility in production costs. These contracts must expire before the current selloff in oil and other commodities will begin to be reflected in producer prices. European Central Bank President Jean-Claude Trichet has cited lingering price pressure “in the pipeline” as a key reason to hold off on cutting interest rates, saying it is “something which is ongoing and undoubtedly creates more risks.” Still, bond yields reveal the market is pricing in the ECB to issue a 25-basis point rate cut by the first quarter of next year.
[I]To contact Ilya regarding this or other articles he has authored, please email him at <[email protected]>[/I].