The currency blog

t was no real surprise last night that the Reserve Bank of Australia kept interest rates on hold at 4.5%. for a second consecutive month A cautious statement followed the decision, Governor Steven alluded to the turmoil in debt stricken Europe and viewed growth in China “starting to moderate to a more sustained rate”. Given the recovery from the global downturn, the reserve bank sees rates as correct, however crucially dropped “for the near term” language and this takes them to an unbiased stance from their implicit tightening bias before. They continued to say this view is “pending further information about international and local conditions for demand and prices” effectively confirming this neutral opinion. Commentators have generally welcomed the decision and felt an additional rate rise would have been unwarranted, as improvements in the local economy builds momentum but remains uneven with softness in the building and retail sectors. FX markets reacted well to the news with the Aussie dollar rallying from $US 0.8372 pre-rate decision to a current position of $US0.8487- a much needed boost given the recent depreciation in the last few weeks.

Back to the UK and yesterday saw the Purchasing Manager Index services for June fall from 55.4 to 54.4 against an expected 55.00 figure. Not usually a market mover, however given the lack of liquidity in the markets given the US public holiday, this allowed Sterling to subside further against the Euro and the Dollar and now we currently sit at GBPEUR1.2050 and GBPUSD1.5169. In other UK news the Bank of England announced the addition of Martin Weale to the MPC board. Markets completely ignored the appointment as Sterling remained on the back foot for the UK session.

In a quiet day of releases we have the first details of EU stress testing criteria and how the banks will be tested. The European Central Bank are also expected to give details relating to present activity in its Securities Markets Program. Since the spring, it appears that the Central Bank has bought and settled bonds to the value of Euro 59 billion in a response to the recent spiralling of European sovereign debt and planned to guarantee “the depth and liquidity in those market segments that are dysfunctional”. Trichet has consistently pledged that these measures would be ‘sterilised’ yet so far this process has proved unsuccessful. Whether it is just that banks prefer to retain their liquidity or whether it is sinking desire for the underlying asset remains to be seen. On balance, if it is the latter then this will be taken bearishly by Euro holders.

In terms of the rest of the week, we have interest rates in the UK on Thursday ahead of unemployment data in Canada on Friday.

Discuss on this on the Currency Exchange Forum