Euro Firm On ECB Expectation, Aussie Mildly Higher After RBA

The euro was lifted as ECB President Draghi hinted that the central bank could buy bonds of maturity up to three years and in such case, he's not at risk of breaching EU rules. Draghi said in a closed hearing in the Economic and Monetary Affairs Committee of the European Parliament that bonds of maturity up to "one year, two years, or even three years" will "easily expire." Hence, he noted "there is very little monetary financing effect."

Under his plan, ECB would buy bonds together with EFSF and ESM to relieve the pressure of the high borrowing costs of Spain and Italy, based on some conditionality of reform. Draghi emphasized that the central bank "cannot pursue price stability now" because of a "fragmented eurozone." And, "all this has to do very much with the continuing existence of the euro in a moment when the rest of the world has now started to question the existence of the euro."

Moody's lowered the outlook of EU's AAA long-term bond rating to "negative" from "stable" yesterday. The rating agency noted that "it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states," based on the negative outlooks for UK, Germany, France and Holland.

The triple-A rating was maintained because of the bloc's "conservative budget management" and "the creditworthiness and support provided by its 27 member states." But EU is at risk of a downgrade on "deterioration in the creditworthiness of EU member states." Also, "weakening of the commitment of the member states to the EU and changes to the EU's fiscal framework that led to less conservative budget management would be credit negative."

The aussie recovered mildly after RBA kept rates unchanged at 3.50% as widely expected. The board judged that current monetary policy remained "appropriate" and expects inflation to be "consistent with target" and growth "close to trend" even though "a more subdued international outlook than was the case a few months ago." Domestically, growth was supported by "very large increases in capital spending in the resources sector" and was firm in first half.

Unemployment rate has "remained low." Inflation also remains "low" but the carbon price will affect consumer prices over the next couple of quarters. Globally, the bank noted that China's growth remained "reasonably robust" in the first half even though recent indicators pointed to some uncertainty. Asian growth is being "dampened" by moderate Chinese expansion and Europe. RBA also noted that "markets for key natural resources are adjusting accordingly and terms of trade have "declined significantly. Exchange rate has "declined over the past month or two" but remains higher than expected.

On the data front, UK BRC sales monitor dropped -0.4% yoy in August. Japan monetary base rose 6.5% yoy. Swiss GDP and UK PMI construction will be released in the European session with eurozone PPI. US ISM manufacturing index will be the main focus today and is expected to improve slightly to 50 in August.