Australian Dollar Outlook 11/02/2011

The Australian Dollar is weaker against the US Dollar following yesterday's rate cut by the RBA, softer than expected Chinese PMI data and Greece's announcement of a referendum on last week's Euro-zone bailout package.

Australia: News that the Greek Prime Minister Papandreou called for a referendum on last week's Euro-zone bailout package came as a genuine shock and caused anger from members within his own party. It remains unclear whether the proposed referendum vote would pass the Parliament with the ruling party PASOK only holding 152 of 300 seats. Talk of a Greek debt default, being ejected from the euro, financial stability in the euro region and risks of contagion are all well and truly on the table and causing major debate. The markets believe it is likely the ECB will keep purchasing distressed bonds and cut its policy rate and what seems more important than ever before, is that euro-zone policy makers develop a sound strategy for Greece to prevent contagion to Italy. Here the Reserve Bank of Australia cut the official cash rate by 0.25% to 4.50% yesterday and it appears in the statement the current rate is closer to a neutral stance given the weaker local inflation outlook and weaker global economy. The markets are describing yesterday's cut as a one-off move as opposed to the beginning of a series of such cuts, with the RBA focused on growing the economy as fast as possible while keeping inflation consistent with the target rate. It is hard to believe the most recent example for a one-off move was the 0.25% cut that occurred in isolation in December 1998 nearly 18 months after the Asian crisis began. We see the AUD consolidating at the 1.0300 level today after the recent fall.

Majors: Most currencies weakened against the US Dollar and stock markets in the US and Europe were hit hard after the Greek referendum announcement, which led the markets to truly wonder about Europe's ability to deal with the sovereign debt crisis. Gold strengthened and metals and soft commodity prices were generally lower. China's official PMI for October was weak at 50.4, much lower than the 51.2 recorded in September, and input prices registered the biggest drop since October 2008. There was good news in the US data front, with the October ISM manufacturing reading being above the crucial 50 point 'expansion' marker, providing a further indication that the US economy is not heading towards a recession. In Europe tonight, the market is expecting the ECB to leave rates on hold at 1.50%.

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