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Forex Flash: Market positions for ECB action - BTMU

FXstreet.com (Barcelona) - Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ notes that following very strong equity market gains in Europe yesterday, the momentum has followed through into the Asian session, with notable gains in response to Europe and the more modest US gains.

He continues to add that European equity markets were helped by the further tightening of 10 year periphery spreads over Germany, He writes, “This move may have started with positive political developments in Italy but we believe this has now morphed into the markets positioning for easing measures from the ECB next week.” Halpenny sees that the only data of note from Asia today didn’t disrupt the positive momentum of easy or easing central bank monetary stances with inflation from Australia coming in weaker than expected.

He notes that the Q/Q increase in CPI was 0.4% in Q1, much weaker than the expected 0.7% gain which leaves the annual rate at 2.5%. The trimmed mean was also weaker with the annual rate decelerating from 2.3% to 2.2%. The downward pressure on prices is coming from tradable inflation, which fell 1.2% Q/Q and is 0.2% down on an annual basis and was the second consecutive Q/Q decline and the largest drop since Q3 2009 and of course largely reflects exchange rate movements. In contrast, he adds that the non-tradable annual inflation rate increased to 4.2% underlining domestic price pressures. Nonetheless, he comments that the CPI data will back up the stance of the RBA which has highlighted the scope offered by low inflation to ease its monetary stance again if demand conditions warrant it.

Clearly with tradable inflation in negative territory, he feels that any domestic demand weakness will quickly prompt the RBA to ease its monetary stance again. The recent weak labour market report and the evidence of muted recovery in China would suggest scope for easing in the coming months. he writes, “It is worth noting also the announcement from Australia that it intends to invest about 5% of its reserves in China – the first direct investment outside Japan in Asia. RBA Deputy Governor Lowe also acknowledged the investment interest the other way and with that in mind, any RBA rate cut – although negative for the Australian dollar – is unlikely to result in sharp falls in AUD/USD.”

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