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Forex Flash : US Dollar & Yen firm as political uncertainty rises in Europe – BTMU

Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ notes that the USD and Yen have continued to firm in the Asian trading session, reflecting rising political uncertainty in Europe which is resulting in a re-widening of the Eurozone sovereign credit risk premium.

He adds that risk assets including high beta currencies such as the Australian dollar have come under pressure following recent strong gains as investors risk seeking behaviour is challenged. Further, he sees that AUD weakness has also been driven overnight by the RBA’s monetary policy meeting at which it left the door open for further monetary policy easing ahead.

He adds that in the accompanying policy statement, the Board acknowledged that “with growth likely to be a little below trend over the coming year an accommodative policy stance is appropriate”. The current “inflation outlook affords scope to ease policy further, should that be necessary to support demand”.

Hardman continues to note that the RBA was also less upbeat than expected regarding the ongoing rebound in global growth and rise in the price or iron ore which supports Australia’s terms of trade. He feels that the improving growth outlook in China continues to be a positive development for the Australian dollar.

The services PMI survey for China released overnight by HSBC and Markit revealed that business confidence increased to its highest level in January for four months rising to 54.0 from 51.7 in December. The survey signals that the economic rebound is likely to gather momentum in the 1H of 2013.

He finishes by writing, “Overall the more dovish than expected RBA statement supports our view that it will likely continue to lower their target rate towards 2.50% in 2013 which will have a only a modest weakening impact upon the Australian dollar as yields will still be relatively high in Australia.”

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