Asian Market Update: RBA Surprises with a 25bp Cut, Downbeat on Credit, Employment, and Inflation; Bank of Japan Unanimously on Hold, Limits Policy Response to Expansion of Eligible Loan Collateral; AUD Contained by Intraday Trading Band Despite RBA Action, While JPY Rebound Fails to Prompt Nikkei Profit-taking

- A pair of central bank decisions from Japan and Australia comprised key event risks in the Asian session, with markets unable to build firm consensus on the latter and looking for hints of additional quantitative easing from the former. Bank of Japan delivered the first verdict with a unanimous hold at 0.10%, and also stood pat on additional buying of debt, instead offering to expand the range of eligible collateral for loans to government debt within 10-year maturity. The BoJ also offered a more mixed assessment of economic prospects, forecasting continued weakening in domestic demand but calling for moderation in exports contraction leading to an economic recovery in late FY09 (ending in March of 2010). Policymakers did acknowledge downside risks to inflation as well as remaining high uncertainty over economic outlook. Earlier, Japan's Finance Minister Yosano offered a more sobering view of prospects, suggesting that fiscal situation in Japan remained "severe" with funding for fresh stimulus becoming difficult to procure, requiring a downwardly revised economic forecast to be submitted ahead of the additional budget plans. Japanese Yen saw modest reversal in favor of longs but failed to put a damper on the equity rally. Nikkei225 was up 0.3% going into midday break and subsequently traded around unchanged entering the final hour of trading. In notable share news, Hitachi Construction was weaker after Nikkei speculation the company would see its FY09 operating profit fall 50%. Additionally, Nintendo fell 2% on reports of March Wii sales underperforming those of PS3 because of the latter's recently more desirable game selection.

- In Sydney, RBA surprised consensus estimates that saw cash rate remaining on hold at 3.25% with a 25bp cut to 3.00%. Aussie policy makers downgraded their view on inflation with outlook below that of the prior two years and also cited weakening labor demand and challenging credit conditions.
Note, Australia will release the latest employment figures as well as an update on housing sector later this week. Following the rate decision, NAB and ANZ analysts saw RBA leaving the door open to additional easing, targeting 2.00% cash rate bottom. Australia's financials and mining names led S&P/ASX to relative regional weakness, with the index closing down 1.3%. Notably, Rio Tinto fell about 10% amid ongoing uncertainty over Chinalco deal that led the company draw up contingency equity offerings as well as rumors of the company offering a 20% discount in iron ore prices to Asian steelmakers. In other Australia developments, Prime Minister Rudd called for creation of a broadband network as part of the national infrastructure buildup plan. The government would make an initial investment of A$4.7B, inviting private sector to participate in the project. Aussie Telecom giant Telstra was higher by 4% following the announcement even though the company saw little short-medium term impact from the plan.

- Elsewhere in Asia, World Bank cut Eastern Asia 2009 growth forecast to 5.3% from 6.7% amid ongoing falling export demand, but did call for China economy to hit bottom sometime in 2009 and for the region to outperform on a relative global basis due to China's large stimulus plan. In Korea, shares of Hynix gained after rumored 10-20% raise in DRAM chip prices benefiting the company. In New Zealand, Q1 NZIER Business Opinion Survey came in at 35-year low of -65 vs -64 in the prior quarter.

- In currencies, trading in AUD was volatile following the RBA cut with AUD/USD selling down to session lows around 0.7065 but subsequently rising above 0.7150 on profit-taking among recent buildup of shorts. In other commodity FX, NZD traded down to 0.58 after poor NZIER, while USD/CAD ranged between 1.2370-2470. The dollar was initially firmer against European majors, selling down to 1.3320 and 1.4640 against EUR and GBP before falling again in late session on persistent risk appetite driven trade. Japanese Yen extended early session gains, with USD/JPY briefly falling below 100.30 after reaching intra-day highs above 101.40 earlier in US hours.

- Spot gold is currently higher by more than 0.50% and gaining for the first time in 4 sessions, after falling sharply during the NY session. The Asian session gains in gold prices are being attributed to bargaining hunting and a technical rebound. In terms of the technical outlook for gold, some market players see support around $865 and $850. Crude oil is little changed at the time of writing, after declining by more than 2% during the NY floor session. During the US session, oil prices tracked the declines in equities. Also renewed growth concerns weighed on oil prices.