Aussie Tumbles on Risk Aversion and RBA, Kiwi Follows

Aussie tumbles sharply in Asian session today on risk aversion as Asian equities extend this week's slide on China growth concern. Meanwhile, the aussie is also additionally pressured as RBA left rates unchanged and kept the door open for more rate cuts. AUD/USD is back pressing 1.0597 support looks set to take it out today to confirm near term reversal. NZD/USD is even weaker on S&P comments. Markets are pretty steady elsewhere thought, with dollar staying in tight range against European majors. The recovery of Euro, Sterling and Swissy against dollar yesterday was rather weak. In particular, EUR/USD is vulnerable to another selloff as markets's attention remains closely on Greece PSI situation. Yen continues to consolidate recent selloffs.

Investors appeared to be disappointed by China's Premier Wen Jiabao’s announcement that the country's economic growth target is reduced to +7.5% this year while inflation will stayed at +4%. The Chinese government also reiterated to maintain a 'proactive' fiscal policy and a 'prudent' monetary policy. This is the first time that China forecasts its growth at below 8% since 2005. While this may disappoint some investors, the goal is a signal that the government policy has shifted the composition of growth to consumption from exports and investment. Meanwhile, the government set the fiscal deficit target at RMB 800B, or around 1.5% of GDP. The local government deficit (bond issues) increased to RMB, up from RMB 200B in 2011.

Regarding China, it's reported that PBoC governor Zhou Xiaochuan is considering to widen the Yuan's trading band as the RMB exchange rate has "gradually met the requirements for greater floating." This echoed Premier Wen's comment that China will make currency regime more flexible and keep the Yuan "basically stable at an appropriate and balanced level."

RBA left rates unchanged at 4.25% today as widely expected. Aussie is sharply lower as markets seen the accompanying statement as more dovish than expected. The statement noted that "world economy will grow at a below-trend pace this year" and situation has not worsened from 2011 in general. Financial pressures on European banks has been "alleviated considerably" by policy markers but "Europe will remain a potential source of shocks for some time yet". Australian economy is expected to grow "close to trend overall while CPI is expected expected to fall further over the next quarters or two. RBA expects inflation to stay in the 2-3% range over the coming one to two years. RBA noted that the current monetary policy is "appropriate for the moment" with close to trend growth and close to target inflation. But there will be scope for easier policy should demand conditions weaken "materially".

S&P said that concerns on private sector debts could trigger investors to shirt away from NZD denominated assets and spurs a "sharp depreciation" in the currency. Also, S&P warned that "downward pressure on NZ ratings could re-emerge if external position continues to worsen" as "portfolio shift could hit the NZD, raise borrowing costs, hurt economic growth".

Regarding Greece, so far, it's reported that participants of the PSI debt swap deal are holding around 20% of the bonds so far and that include Participants of the program include National Bank of Greece SA, Alpha Bank SA, BNP Paribas SA and Commerzbank AG. Greek Finance Minister Venizelos told private holders of Greek Government debt that the current PSI offer was the best offer as "this is the only one, the only existing offer".

It should be noted that, firstly, successful PSI is a important condition for getting the second EU bailout. Secondly, Greece must need to get at least 75% of private bond holders to participate in the debt swap to avoid the so-called "collective action clauses". However, CAC activation will likely be deemed a credit event by the relevant ISDA commission and trigger CDS payments. Thirdly, if the participation is lower than 66%, even CAC would become invalid.