EUR/USD traded higher this morning in line with the better tone of stocks markets.  Reports that Dubai is negotiating to restructure $26 mln of debt has lessened the risk of default and strong print from Chinese manufacturing PMI data has combined to support the risk trade.

The policy decisions announced by the RBA and the BoJ this morning could hardly be much different.  The RBA announced a third consecutive monthly rate hike, pushing rates up by 25 bps to 3.75%.  By contrast, the BoJ in an emergency meeting announced it would provide JPY10 trn in emergency lending.  Both the AUD and the JPY rose vs the USD on the news.  The AUD was supported by confirmation by the RBA's of its forecast that growth is likely to be close to trend in 2010 and by warnings from Treasurer Swan that rates would rise as growth strengthened.  The USD/JPY sold off sharply following the BoJ's announcement on disappointment that it did not do more to offset JPY strength.

The market had expected the BoJ to do more than provide Y10 trn in short-term loans to commercial banks.   QE and even currency intervention has been feared by some investors to complement the emergency budget that the government will announce this week.  Disappointment at what was seen as a half-hearted response to an economy in deflation took USD/JPY sharply lower on the news from an intraday high of USD/JPY87.53.  The JPY is set to remain in the forefront of attention. Tomorrow, the gov't and the BoJ will meet.  Given recent accusations from the gov't that the BoJ is not taking enough action to stimulate economy and given the clear constraints on budget spending, it is very likely that the BoJ will be pressured to take more action.  That said, in view of the Fed's commitment to keeping rates low for an extended period, it is possible that the Japanese authorities can hope only to slow the pace of the JPY's appreciation vs the USD and this continues to lessen the threat of intervention.  

Swiss Q3 GDP was in line with expectations at +0.3% q/q.  This confirms that the Swiss economy is out of recession aided by recovering exports and investment.  The data suggests there is no need for the SNB to take emergency measures to shore up its economic prospects and this may lessen the resolve of the SNB to protect the downside in EUR/CHF.  EUR/CHF edged as low at 1.5071 this morning, allowing USD/CHF to push back to parity.  

UK PMI manufacturing data registered a disappointing 51.8.  While this is still consistent with expansion suggesting that the UK recovery is a growth phase, is also suggests that growth in the sector could be at a plateau or at best erratic.  Either way is suggests the economic outlook in the UK is still vulnerable.  That said, sterling has edged higher vs both the EUUR and USD this morning aided by another set of positive house price data from the Nationwide (Nov +2.7% y/y).  Cable has traded at an intraday high at USD1.677 today.

This afternoon US ISM manufacturing and pending home sales data are due.  
Jane Foley
Research Director
+44 207 398 5024