Aussie Weakens On Unexpected RBA Cut

Aussie dives across the board after RBA unexpectedly cut rates by 25bps to 3.25% today on international developments and weaker growth outlook for 2013. Markets expected the central bank to stand pat. Interest rates are now back to the lowest level since 2009. In the accompanying statement, RBA governor Stevens noted that global economy softened with risks on the downside. As a result, "key commodity prices" remain "significantly lower than earlier in the year" and terms of trade dropped by over 10% since last year's peak.

Indicators suggest Australian growth would be close to trend with "large increases in capital spending" in resources sector. But the peak is "likely to occur next year", and may be "at a lower level" than expected. Labor market has generally softened in recent months. Inflation is expected to be consistent with target over the next one-to-two years. Technically, AUD/USD dipped through 1.0328 minor support today and current fall from 1.0624 is extending to 1.0165 support level.

Though, we'll continue to stay neutral in the pair as a breakout from range of 1.0165/0624 is needed to clear the mixed near-term outlook. EUR/AUD, though, looks like resuming recent rally after today's jump. September's high of 1.2552 would likely be taken out soon.

At a speech at the Economic Club of Indiana, Chairman Bernanke affirmed that aggressive stimulus would be sustained even after the US economy strengthened. He stated that the central bank expects "that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens." He noted that Fed has been following low interest rate policies for about five years and that "have not led to increased inflation" and "public’s expectations of inflation over the long run remain quite stable."

He emphasized that "responsibility for fiscal policy lies squarely with the administration and the Congress" and "using monetary policy to try to influence the political debate on the budget would be highly inappropriate.” Also, he urged fiscal policemakers to "put the federal budget on a sustainable path, but not so abruptly as to endanger the economic recovery in the near-term" as they will soon have to address the "fiscal cliff."

In Europe, ECB Executive Board member Asmussen said that "it remains to be seen" whether the banking supervision structure can start as planned on January 1st of 2013. Meanwhile, Asmussen also emphasized "to all those who are angling for a possible direct bank recapitalization via the ESM and are prepared to go with a half-baked solution for the banking supervision: not with us. We won't sacrifice the ECB's reputation for this." Meanwhile, he expects "a stronger cohesion among the euro countries in particular will have a positive impact beyond the eurozone."

On the data front, UK PMI construction and Eurozone PPI will be the main feature today.