Daily Report: Euro Led Major Currencies Down, RBA Cut, UK GDP Watched

Euro led major currencies down against dollar overnight and remains weak on a couple of factors. Firstly, there was news that Greece may need a referendum for passage of the new EU agreement. Secondly, China seems quite reluctant to step up its support to Eurozone rescue fund so far. Thirdly, OECD cut Eurozone's growth forecasts sharply. Meanwhile, disappointing Chinese manufacturing data adds further weight on the market sentiments in Asian session today. Dollar index is back above 76 level as Asian equities are broadly lower following the -276 pts fall in DOW. Aussie is also additionally weighted down by RBA's rate cut today. Nevertheless, one more thing to note is that EUR/GBP also displayed notably weakness and more volatility would be seen after today's UK Q3 GDP release.

The Greek Prime Minister Papandreou said yesterday a referendum is need for passage of the new EU agreement. Meanwhile, he also needs a vote of confidence in parliament which will begin tomorrow and end on November 4. There's possibility for the government to lose the referendum as survey showed that 59% of respondents were against the new EU agreement, although 73% wanted to stay in the Eurozone. In case of a loss, new elections would have to be held but it would take place after 3-4 weeks after the parliament is dissolved. During the political vacuum, austerity measures being implemented in the country will be suspended. In a likely circumstance that the opposition party will win the early election, renegotiation of all deals may be needed. Of course, EU leaders' reaction by then is also highly uncertain. Under such scenario, it's unknown whether the IMF will withhold its funding of EUR 2.2b to Greece which is expected to be disbursed in mid-November.

Chinese President Hu Jintao said yesterday that he's "convinced that Europe has the wisdom and the competence to overcome the current difficulties." But Hu said nothing about buying more European debts of any form. A form member of PBoC monetary policy committee wrote in Financial times and said that China has never committed to solve the Eurozone debt problems and warned European not to blame China if the help fell short of expectation. Overall, it's still believed that China would prefer to lend money through IMF instead.

OECD cut Eurozone's growth forecast for 2012 to 0.3%, sharply lower than May's projection of 2.0%. Debt to GDP ratio is expected to continue to rise to 97.6%. OECD praised the measures by EU as going in the "right direction to resolve the euro-area sovereign-debt crisis" but "more detailed information is needed on the specific measures, including the options for EFSF enhancement." Also, OECD urged to "clarify and implement fully and decisively the measures announced on October 26th to break the link between sovereign debt and banking distress." Meanwhile, uncertainty about implementation could trigger “a deterioration of financial conditions of the magnitude observed during the global crisis" and caused -5% contraction in GDP in H1 2013.

The RBA cut the cash rate for the first time since April 2009, by -25 bps, to 4.5% as inflation has been contained by 'subdued demand conditions' and 'high exchange rate'. In the policy statement, the RBA delivered a more cautious view in global economic growth. It also lowered its inflation forecast and signaled growth outlook will be more in line with trend. We believe the reduction in interest rate is more of fine-tuning of the monetary policy than a beginning of an easing cycle. More in RBA Cut Cash Rate To 4.5%, Not A Beginning Of Easing Cycle. Australia house price index dropped -1.2% qoq in Q3, better than expectation of -1.5% qoq.

The official Chinese PMI unexpectedly plunged to 50.4 in October from 51.2 a month ago. Markets expected a rise to 51.8. The reading fell to the lowest level in almost 3 years as 'new order' slumped to 50.5 from 51.3. Weakness in new orders was in turn driven by 'new export orders' which plummeted to 48.6 from 50.9. The situation indicated that economic growth in China has been facing more external risks than domestic risks. The manufacturing data further evidenced that Chinese economy is slowing. This may give the government some thoughts on monetary stance. Yet, we do not envisage a rate cut this year even though there are speculations that it will lower reserve requirement ratio for smaller banks by the end of the year.

The Japanese yen continues to stay in range against other major currencies after yesterday's intervention driven fall. Finance Minister Azumi emphasized his commitments today by declaring a "war of nerves" against speculators and pledged to take "appropriate decisions" on additional market actions to stop speculative yen gains. The Japanese media speculated that the scale of intervention yesterday was between JPY 6T to JPY 10T, much higher than the scale of intervention in August. There were talks of Japan adopting a Swiss style ceiling in the Japanese yen but markets see little chance of it as that could set a precedent for other Asian countries.

UK Q3 GDP will be the main focus in European session. Markets expect GDP to expand by 0.3% qoq, a slightly better figure than Q2's 0.1% qoq. Also, UK will release PMI manufacturing and index of services. Swiss will release retail sales and SVME PMI. From US, main focus will be on ISM manufacturing which is expected to rise to 52.2 in October.