European banking concerns resurface, Key central banks leave rates unchanged
A news report released overnight showed that European stress tests understated some holdings of sovereign debt. While the report weighed on the euro, it did not come as groundbreaking news to many. Investors questioned the credibility and rigors of the Committee of European Banking Supervisors (CEBS) stress tests back in July. In addition to the renewed banking concerns, Europe’s strongest economy showed signs of slowing. German factory orders dropped -2.2% in July from the prior +3.6% while the market was anticipating a +0.5% rise. The weaker than expected data added to negative sentiment and sent EUR/USD tumbling to around 1.2750. European stock markets are currently trading lower across the board following mostly lower Asian markets. The safe haven currencies (USD, JPY, and CHF) firmed as a result of the risk aversion.
Central banks met overnight with no change in policy from the RBA or the BOJ. The RBA kept the overnight cash rate target at 4.5% and the BOJ maintained its target rate at 0.1% as expected. The BOJ emphasized downside risks to GDP growth due to “increased uncertainty” over the global outlook. The bank also noted that in addition to “maintain the extremely accommodative financial environment” it would “take policy actions in a timely and appropriate manner” if necessary. The bank’s reluctance to implement additional quantitative easing measures was not surprising given the muted response from last week’s emergency meeting and decision to expand the lending facility. In Australia, politics remain in focus as Julia Gillard’s Labor Party retained control of the government with the backing of independents. The removal of political uncertainty saw a minimal response in AUD as control by the ALP allows the government to pursue the mining tax. The RBA comment that the global economic outlook remains “somewhat uncertain” also weighed on the currency as the Aussie is closely linked to global growth and commodity demand. AUD/USD fell from session highs around 0.9180 to lows near 0.9095.
There is no significant economic data due out today.
