Daily Report: RBA Cuts 100bps, Yen Consolidates

RBA has the deepest rate cut since 1991, cut by 100bps, bringing the OCR down to six year low of 4.25%. Though, Aussie is supported by some speculations that RBA's easing cycle is close to an end, if not over and pares some of yesterday's losses. High yielders also take a breath as the Japanese yen retreats mildly from yesterday's sharp gain. BoJ left overnight call rate unchanged at 0.30% in an unscheduled meeting today and announced money market operation measures to facilitate corporate financing. Nevertheless, overall sentiments remains fragile and another round of yen rally is still expected as the day goes. Dollar index remains firm at around 87 level and rebound from 84.78 is still in favor to extend to retest 88.46 high. Crude oil dives to new low of 47.58 and remains pressured on worry of global recession.

While the rate cut is larger than "consensus" expectation of 75bps, RBA statement said that monetary policy is now in an "expansionary setting". RBA also noted that "together with the spending measures announced by the government, and a large fall in the Australian dollar exchange rate, significant policy stimulus will be supporting demand over the year ahead." Some economists argue that this part of the statement suggests RBA is near to the end of the easing cycle, if not over. Considering that RBA will not meet again until Feb, it's clear that the bank is adopting a wait and see attitude for the effects of prior cumulative 300bps cut as well as various other stimulus moves on the economy. Nevertheless, note that Stevens didn't shut the door for the further easing yet and the rate outlook will very much depends on the upcoming economic data as well as development in the financial markets. Exchange rate of Aussie would probably remain driven by risk aversion/appetite the picture is cleared.

Also released from Australia earlier today, Australian retail sales surprisingly rose 0.7% mom in November, big improvement from -1.1% in September and better than market expectation of -0.2%. In terms of components, food and other retailing rose 0.4% and 7.6% respectively while others such as clothing and household goods dropped. As most of the gain was brought by 'other retailing' which is volatile in nature, we do not treat the rise as representative. In fact, given the sluggish economic growth and restrained domestic spending, we expect retail sales to be under pressure for some time.

In addition Australia reported a seasonally adjusted current account deficit of A$ 9.736B in 3Q08, better than consensus of a deficit of A$11.1B. The figure for 2Q08 was revised to deficit of A$14.043B from A$12.77B. The current account deficit has been narrowed for the second consecutive quarter and was helped by increase in export of coal and iron ore, especially to China, as well as reduced consumer spending on imported goods such as autos. The situation is expected to persist in the coming quarter. The net income deficit narrowed to A$11.07B in seasonally adjusted terms, the smallest in 3 years while goods and services trade balance recorded a surplus of A$1.43B from a deficit of A$1.26B.

Overnight, National Bureau of Economic Research (NBER) said that the US economy has been in recession since Dec 07. The report from NBER said that "domestic production and employment are the primary conceptual measures of economic activity" and payroll employment "reached a peak in December 2007 and has declined every month since then." Fed Bernanke said the room to lower interests from form the current 1% level is "obviously limited" even though it's still feasible. Fed will dig deeper into the toolkits instead and economists said that this could be the start of a shift to "quantitative easing" that resembles what BoJ did in 2001-2006.

Looking ahead, sharp decline in energy prices since Jul is expected to be reflected in further moderation in inflation in Europe. Swiss CPI is expected to drop from 2.6% yoy to 1.9% yoy in Nov. Eurozone PPI is expected to drop from 7.9% yoy to 7.1% yoy. UK construction PMI is expected to deteriorate further from 35.1 to 33.5 in Nov, signaling deeper contraction in the construction sector.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.6333; (P) 0.6436; (R1) 0.6502; More

AUD/USD weakens further to 0.6332 today but recovers mildly after hitting 0.6332 support. Intraday outlook remains neutral for the moment. As discussed before, break of 0.6332 will confirm that rebound from 0.6075 has completed at 0.6619. In such case, intraday bias will flip back to the downside for 0.6075 and then 0.6008. On the upside, though, above 0.6619 minor resistance will suggests that rebounded from 0.6075 is still in progress and another rise to above 0.7014 could be seen before completing consolidation from 0.6008.

In the bigger picture, whole fall from 0.9849 has possibly completed the five wave sequence already, with the fifth wave ended at 0.6008. However, note that the impulsive nature of the fall from 0.9849 to 0.6008 indicate that price actions from 0.6008 is developing into correction/consolidation only. The long term down trend is still expected to resume after completing the consolidation. Sustained break of 0.6008 will indicate that the down trend from 0.9849 has resumed for at least another five wave medium term decline, targeting 0.4773 (01 low). But, note that as long long as 0.6008 low holds, consolidation from could still extend further. Above 0.7014 will target 38.2% retracement of 0.9849 to 0.6008 at 0.7475 before completing the consolidation.

Forex News Digest

• The Day Ahead Canada and U.S.: Tsy's Paulson and Fed's Plosser to Speak
• The Day Ahead Europe and UK: Euro Zone PPI, UK Consumer Confidence
• RBA Cuts Boosted Australian Consumer Spending, Economists Say
• Australia's Account Deficit Declines in Q3
• Australian Consumers Spent More Than Expected in October
• Closing Market Recap: Stocks Hammered, Yields Fall to Record Lows
• Monday's News Recap: NBER Confirms U.S. Recession, Stocks in Massive Selloff
• Treasury's Paulson Says More TARP Programs on the Way
• Fed's Bernanke Says 1% Target Rate Isn't Floor, Other Actions More Effective
• NBER Says U.S. Economy Entered Recession in December 2007
• Yen Falls on Speculation Japanese Importers Are Selling Before Year-End
• Asian Currencies: Korean Won, Peso Lead Decline on Recession, Stock Slide
• China's Yuan Trades Near Five-Month Low on Before Paulson Visits Beijing

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