While fears about sovereign default have come off the boil, it would be foolhardy to completely dismiss the prospects of an orderly default or of haircuts from a European sovereign in the next year or so. It would also be unwise to overlook the likelihood that growth in the industrial world will continue to face headwinds both from fiscal austerity and from continued relatively tight credit conditions. The watering down of Basel III may mean that bank regulation has a lessened impact on growth going forward. However, the changes made to Basel III were likely made largely because many countries already faced with stressed budget deficits and slow economic growth could ill-afford to have the screws tightened further by reduced credit availability. This morning’s release of the ECB’s Q2 lending survey reports that renewed constraints in banks’ access to funding and liquidity were key factors underlying tighter credit policy. Politicians must accept that tighter regulation for banks is not necessary consistence with the need to get economic growth back to trend levels.
EUR/USD has skirted around the 1.300 level this morning with the confidence in the EUR sapped as risk appetite dwindled. Cable has failed to hold above the USD1.5625 area and is trading in a sideways fashion. This morning’s testimony of the BoE’s MPC to a Treasury Select Committee indicates that Governor Kind is cautious about reading too much good news into the stronger than expected Q2 GDP release and indicated that there was a considerable way to go before policy could be normalised. While dovish tones are evident in the words of Fisher, Sentance maintained his more hawkish position.
The AUD suffered a setback overnight on the release of weaker than expected CPI data. This furthered the likelihood that the RBA will keep policy on hold for some months. AUD/USD has found decent support just above USD0.8920.
US durable goods and the Fed’s beige book will be key this afternoon.