Published: Tue, 07 Jun 2011 05:51 AM
The RBA kicks off a week of central bank meetings
Central Bank policy decisions, or lack of them in some cases, will dominate actions this week. The Reserve Bank of Australia kicked things off today and left rates on hold. Its accompanying statement was perceived as fairly dovish and included the statement that the Bank’s “mildly restrictive stance of monetary policy remained appropriate.”
This led to a sell-off in the Aussie dollar. Australia may have the highest rates in the G10 but if the RBA has come to the peak of its rate-hiking cycle then this could weigh on the Aussie, especially as other central banks, for example the ECB, start to normalise rates.
Elsewhere, Fed speakers last night were listened to eagerly for their views on the recent downturn in the economic data in the US. Head of the Boston Fed Eric Rosengren, who is a non-voter in 2011, said that a slowdown in the pace of the US recovery could affect the timing of the Fed’s exit strategy. However, he said it was too soon to make a decisive judgement on the US economy after only one weak reading of payrolls figures. So we are back to data watching. But there are some more hawkish Fed officials than Rosengren who are voting members this year. Philly Fed President Plosser reiterated his stance that he does not personally see the need for more monetary stimulus during a speech last night.
However, the main event will be Fed President Ben Bernanke who is talking at 2045BST this evening. His view is arguably the most important on the Committee and in the past he has expressed a fairly dovish stance on policy. Bernanke is talking on the economic outlook, if he sounds particularly concerned about the economy, especially the unemployment rate, then we could see bond yields drop and the dollar fall like a stone, crushing any hopes for a rebound in the greenback. On the other hand, if Bernanke sounds more relaxed about the data then the dollar may find some support after coming under pressure today. On balance we think the head of the Fed will sound a note of caution but that he will follow Rosengren and say it is too early to postulate on the likelihood of more monetary stimulus.
Risk is staging a bit of a recovery this morning and European equity indices have opened higher. This may be due to expectations of a dovish Bernanke holding open the door to further monetary stimulus, which stocks and commodities in particular reacted so well to during QE2. So a less dovish Bernanke may weigh on risky assets during the Asian session.
Elsewhere, Greece continues to dominate talk about Europe as plans for more financial assistance appear to be on-going. The next major date is 20th June when EU leaders meet to discuss/ agree on further aid to the stricken Southern European nation. Some officials are getting frustrated with Athens’ lack of progress. EU Commissioner Ollie Rehn chastised Greece’s political parties yesterday for failing to agree on fiscal consolidation measures. In no uncertain terms, Rehn said that if agreement on how to cut its deficit isn’t reached then its European partners cannot be expected to provide more funds. He also added that Greece is in default if it doesn’t get help from the EU/ECB and IMF.
Serious words from the EU Commissioner. Added to this, the Eurogroup Chairman Juncker said that solutions currently being discussed to solve Greece’s fiscal problems would not lead to a technical default.
Jucker also noted a word of caution on the strength of the euro and said that the currency bloc should have a designated FX policy. Right now we think this is very unlikely since there are more pressing issues like avoiding a sovereign default to deal with. Also, the ECB has defended its independence fiercely in recent months and will not set interest rates (which can affect the direction of the euro) according to the whims of Europe’s political elite. So Juncker’s comments are u