RBA Cut Rates, Risk Mixed At The Open

A Monday where manufacturing PMI releases had showed some improvement globally was dealt a blow at the last by a poor number from the United States, which showed its first contractionary reading since July. Europe’s overall figure remained firmly in recessionary territory (46.2) with France and the Netherlands both disappointing versus consensus. Only Ireland’s showed an expansion within the Eurozone, i.e. a reading above 50.0.

The UK number came in at 49.7, higher than the 47.7 expected and hopes are that we have seen the worst of the manufacturing slowdown. New orders, a key indicator for future expansion, were also higher, justifying these expectations and further pushing GBP onwards. Today’s construction number will also be closely viewed, given its proximity to tomorrow’s Autumn Statement from the Chancellor, amid hopes that new initiatives such as a plan to underwrite house builders and housing associations will galvanise the sector. Full coverage of the Autumn Statement will be available by the World First Twitter page.

We have seen some further movement from the Republican party overnight on the Fiscal Cliff, however there has been no budging on the imposition of higher taxes on the wealthiest. The plan presented by John Boehner added up to $2.2trn of deficit reduction, a lot more than the $1.6bn plan presented by Obama last week. The rise is mainly due to increased spending cuts such as the $600bn cut to Healthcare; over double what was in the Obama plan. There has been little market reaction to the plan with volatility likely to come only in the last few weeks of December barring someone spitting the dummy out before then.

The RBA decided to cut rates by 25bps last night taking rates in Australia to 3%, a move that was largely priced in. AUD drifted slightly higher after the announcement after the minutes gave little attention to further rate guidance although the board did once again note that the exchange rate remains higher than expected. We expect AUD to perform poorly in 2013 and our trade of the year for the next 12 months is to sell AUDNZD. Further details of this trade and our thoughts for 2013 will be published in our “Global Macro 2013 Outlook” available later this week.

The euro enjoyed another day in the sun yesterday following news from Spain and Switzerland. Spain has finally requested for a bailout to patch up its banking sector, the details of which were worked out over the past few weeks. This was not, however, an announcement of a sovereign bailout for Spain as a country; that would amount to a lot more than the EUR37bn requested yesterday.

We also saw Credit Suisse confirm a rumour yesterday that they would be paying a negative rate of interest on CHF deposits. The bank is trying to limit deposits of the haven franc after pressure from the SNB to reduce balance sheets. The move weakened CHF, driving EURCHF higher and taking the rest of the EUR complex with it. It will be interesting to see if other banks follow suit.