Aussie Capped By RBA Cut, White House Rejects GOP Fiscal Cliff Proposal

Australian dollar attempted a rally earlier in the Asian session but upside was capped after RBA delivered the rate cut by -25 bps to 3.00% as widely expected. Governor Glenn Stevens warned of strong Australian dollar and stated that the near-term outlook for non-mining investment would remain "relatively subdued."

In the global economy, the RBA continued to see the key risk came from eurozone's sovereign debt crisis. While acknowledging improved sentiment in financial markets, it believed that "Europe is likely to remain a source of instability for some time." Moreover, the central bank added this time that "the uncertainty over the course of US fiscal policy is also weighing on sentiment at present."

Concerning domestic economic growth, the RBA "confirmed" that resource investment is approaching its peak and there is a need to strengthen demand in other areas. On the policy, the RBA stated that the effects of previous rate cuts have not been fully reflected in the economy. However, it is "appropriate" for the central bank to lower interest rates further as "this will help to foster sustainable growth in demand and inflation outcomes consistent with the target over time." The easing trend will likely continue through 2013.

In the US, House Republicans have offered their own counter proposal to Obama to avert the so-called "fiscal cliff." The proposal would achieve $2.2T cut in deficit with $900b cut in Medicare spending. In addition, there would be $800b increase in tax revenue through reforms, without raising tax rates. Boehner said in a letter to the White House that the plan is "exactly the kind of imperfect, but fair middle ground that allows us to avert the fiscal cliff without hurting the economy and destroying jobs." However, the White House rejected the proposal and that it "does not meet the test of balance." Communications Director Pfeiffer criticized that the plan actually "lower[ed] rates for the wealthy and sticks the middle class with the bill," and "middle class taxes will have to go up to pay for lower rates for millionaires and billionaires."

Boston Fed Rosengren said that "a strong case can be made for the Federal Reserve continuing to purchase the current $85 billion in longer-term securities a month" even after the Operation Twist program completes at the end of the year. He emphasized that "monetary policies designed to lower mortgage rates and stimulate more activity in interest-sensitive sectors have been effective, and are an important reason why the U.S. economy has performed better than many of our developed-country peers."

On the other hand, St. Louis Fed Bullard pushed for "a statement in terms of actual values for both inflation and unemployment" as thresholds for policy accommodation removals. He said that "switching to a threshold strategy does not necessarily mean that policy would be easier or tighter." And he noted that 6.5% in unemployment rate is "broadly consistent with mainstream analysis of the likely value of the unemployment rate at the time of the first increase in the policy rate."

In Europe, ECB Executive Board member Asmussen said that the central bank is ready for the Outright Monetary Transactions program but have not yet conducted any purchases as it's hasn't been activated. He noted that ECB "will not encourage or discourage" Spain to tap into the program. Meanwhile, Asmussen noted that Portugal is not in a state to use OMT yet as there should be reasonable amounts of bonds with maturities of more than three years and "the country is essentially dependent on financial assistance."

ECB Vice President Constancio said that "the combined effect of the measures implemented" improved the Euro money market conditions in 2012 even though fragmentation remains still high. And, "a key lesson from the crisis is that we need to better understand and monitor the repo as well as the securities lending markets, given their importance for the efficient functioning of the financial system." Governing council member Noyer said that "expansion in central bank money has not affected inflation expectations, which have remained well-anchored."

On the data front, Australia current account deficit widened to AUD -14.9b in Q3, building approvals dropped much more than expected by -7.6% mom in October. UK PMI construction and Eurozone PPI would be released in European session. Bank of Canada rate decision will be the main feature in US session and the central bank is expected to keep rates unchanged at 1.00%.