London Open: Australian Dollar Sold as Interest Rates Stay at 7.25%

The Reserve Bank of Australia validated expectations today as Governor Glenn Stevens kept interest rates unchanged at 12-year highs of 7.25%. Stevens noted that while the outlook for inflation “remains concerning”, current monetary policy “remains appropriate” given expectations that demand will “moderate this year”.

[U][B]Key Overnight Developments[/B][/U]

[B]• Japan’s Tankan Survey Declines Less than Forecast
• Australia’s RBA Validates Expectations, Holds Interest Rates Steady at 7.25%[/B]

[U][B]Critical Levels **
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[/B]** Please see Daily Technical Outlook for details.
[U][B]

Asia Session Highlights[/B][/U][B]

[/B]The [B]Tankan Survey[/B] showed substantial decline in sentiment among large Japanese firms, both manufacturing and otherwise. On balance, the release’s headline indices fell less than economists expected. The release suggests that while companies are certainly feeling the pain of rising energy prices and waning US demand, they expect to weather the storm better than is otherwise estimated. Further indicative of cautious optimism, large companies revealed they would increase spending on capital expansion by 2.4% this year, an upside revision to expectations of 2%.

The [B]Reserve Bank of Australia[/B] validated expectations today as Governor Glenn Stevens kept interest rates unchanged at 12-year highs of 7.25%. Stevens noted that while the outlook for inflation “remains concerning”, current monetary policy “remains appropriate” given expectations that demand will “moderate this year”. Traders took the neutral language of the RBA as a sign of weakness, with AUDUSD falling 28 pips following the announcement. The release was aptly underscored by a drop in June’s AiG Performance of Manufacturing Index – the metric slipped below the boom-bust 50 level to print at 47 versus 51.2 in the preceding month.

[U][B]Euro Session: What to Expect[/B][/U]

The forthcoming session is relatively light on event risk. Things will start off the dual release of German Retail Sales and UK Nationwide House Prices. Traders will look for signs of strength in the former release to compound high energy prices with consumption buoyancy, forcing the ECB’s hand to issue a one-off rate hike at this week’s policy meeting. The latter release is likely to show further decline, with the UK housing market closely mimicking the downward direction seen in the United States.

[B]Switzerland’s Purchasing Manager’s Index [/B]may be particularly interesting this time around should a substantial decline be posted. The mountain nation counts on the European Union to absorb nearly 60% of all their exports. A decline in PMI sentiment would allude that both that the EU (and by extension the Euro Zone) are feeling the effects of the global slowdown and that those effects are being passed on to Switzerland via the trade relationship. [B]Germany’s Unemployment Rate[/B] is expected to remain steady at 7.9%. Germany is the largest economy in the Euro Zone, and this release will offer a timely first look at what traders can expected in the region-wide release only an hour later.

[I]To contact Ilya regarding this or other articles he has authored, please emai him at <[email protected]>[/I]