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We had interest rate decisions from the Reserve Bank of Australia, the Bank of Canada, the Bank of England and the European Central Bank and although the latter three remained unchanged, the RBA increased their base borrowing rate by 25 basis points to 4%. A hike was expected and the subsequent comments from the RBA Governor indicate the bullish mood surrounding the domestic economic conditions down under. This was later reconfirmed with a better than expected Q4 GDP year on year number showing an expansion to 2.7% from 2.4%.
Growth and inflation forecasts remain in line with the RBA's targets and although we aren't expecting policy tightening every month, we can expect to see the RBA move to normalising their interest rates between 4.25% and 4.75% in 2010. Although the AUDUSD ran out of steam after testing (and breaching) the important 0.9050 level, the pair remained one of the few shining stars this week, closing the week up 0.50% against the Greenback. In the medium to long term, forecasts for AUDUSD in 2010 remain sceptical. With central banks around the world beginning to tighten their respective monetary policies, the ever-deteriorating Greek issue (and the erosion of risk appetite that goes with it), along with inflationary concerns stemming from Australia's largest trading partner, China, one shouldn't be too sceptical on shorting AUDUSD.
Eurozone rates remain unchanged
Turning to the Eurozone, the Governing Council decided to leave the key ECB interest rate unchanged at 1%. Trichet's speech showed that the Governing Council are content with the economic recovery taking place in the euro area, although it will remain uneven (as seen with the Euro zone Q4 quarter on quarter GDP number which came out at 0.1% after growing 0.4% in Q3). The assessment of inflationary pressures remains low in the medium term, close to 2%.
More interesting were Trichet's views on how 'inappropriate' it would be for the IMF to aid Greece. This situation has found Trichet and the ECB stuck between a rock and a hard place - they are trying to steer Europe through one of the worst post war recessions whilst showing the world that Europe can deal with its own issues. Earlier in the week Greece put forward new austerity measures of $6.5bn through a combination of increases in VAT to 21%, trimming of salary bonuses by 30%, tax hikes on luxury goods and fuel and the freezing of pensions. Naturally not too well received in Greece, these moves have been largely applauded throughout Europe's largest economies.
This week's sale of Greek debt went well too (thanks to a 6.35% yield on a 10 year issue); being oversubscribed by more than three times the face value of the offer. Angela Merkel said at a televised news conference that Greece's austerity measures from this week "gives us optimism" that things will go well in the months ahead. We would stop short in sharing this view; not only does Greece have to foot a debt bill of €53bn this year, but they lack the infrastructure to make the necessary structural reforms. Historically European nations have had the advantage of a reduction in short term rates and significant currency devaluations, options which are off the table for Greece.
In addition, with roughly €21bn in fiscal tightening combined with the general sluggishness in economic recovery any Greek growth projections have significant downside risks. And this doesn't even address the potential social response.
Staff
