Aurelia Butler

The Australian dollar (AUD) has experienced a modest decline, dropping approximately 0.4% at the time of the report, performing slightly weaker than its currency peers. The revision in GDP estimates is partly due to an unexpected current account deficit of AUD 4.9 billion in 1Q24, contrasting with UBS’s forecast of a AUD 6 billion surplus.The deficit is largely attributed to revisions in travel data and the reintroduction of the National Visitors Survey, which have led to retrospective adjustments as far back as late 2022.According to UBS, net exports are anticipated to subtract 0.9 percentage points from GDP, more than the consensus estimate of a 0.6 percentage point deduction. However, potential downgrades in this area might be balanced by upward revisions in private spending, leaving the overall trajectory of GDP growth relatively stable.In other economic developments, the Australian Government Fair Work Commission’s decision to increase minimum wages by 3.75% in July, which affects a smaller portion of employees, came in below UBS’s estimate of around 4%. Conversely, signs of a modest revival in manufacturing PMIs and a strong monthly increase in house prices have been observed.UBS also noted a lowered risk of further interest rate hikes by the Reserve Bank of Australia (RBA) and continues to anticipate the first rate cut of 25 basis points in February 2025. The firm has extended its AUDUSD forecasts, which remain unchanged, adding a June 2025 target of 0.70.From an investment perspective, UBS maintains a preference for the AUD, advising investors to sell AUDUSD’s downside price risks and to remain long on the AUDEUR. Additionally, they suggest going long on the AUDNZD at 1.08 or below over a six to twelve-month horizon.The firm also outlined boundaries based on technical indicators, with key moving averages providing support around 0.653–0.657. Key risks to the AUDUSD include potential hawkish moves by the U.S. Federal Reserve, geopolitical tensions between the U.S. and China, Chinese economic downturns, or an unexpected rate cut by the RBA.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

MUMBAI (Reuters) – India’s government bonds will continue to attract foreign flows even as a narrower-than-expected victory margin for Prime Minister Narendra Modi-led alliance could prompt a shift in policy, fund managers said.Foreign investors have piled on bonds this year and remained on the buying side on Tuesday, despite the unexpected election outcome hitting stocks, bonds and the rupee on concerns over populist spending and a stalling of reforms.”The knee-jerk response of higher yields and some currency weakness could indeed be an attractive opportunity to add risk,” Kenneth Akintewe, head of Asian sovereign debt at abrdn, said.In spite of a risk of more populist policies, the fiscal “starting point is much stronger than expected” and the election results do not do much to derail the positive outlook for bonds, Akintewe said.Expectations of a burst of populist spending soon after the elections may be unfounded, Adarsh Sinha, co-head, Asia FX & rates strategy at Bank of America, said. “For the government, what would be the incentive to splurge after the election in the near term?” India’s fiscal deficit for the current financial year should settle around 5% of GDP against a budget target of 5.1%, Sinha said, pegging the benchmark 10-year bond yield to ease to 7% by the end of 2024. Demand from overseas investors and long-term domestic buyers had pushed bond yields down until Monday. Indian bonds are also set to be added to JPMorgan’s emerging market debt index later this month, which should help stabilise yields.Bank of America’s Sinha expects passive inflows of $21 billion into Indian bonds until March 2025.”Despite potential near-term outflows, India’s long-term growth trajectory remains compelling, which is likely to attract inflows into government bonds over the medium term,” Manish Bhargava, a fund manager at Straits Investment Management, said. More

MUMBAI (Reuters) – India’s central bank is widely expected to keep interest rates steady and retain its tighter monetary stance at its policy review on Friday amid robust economic growth and an uncertain inflation outlook.However, a weakened mandate for the ruling Bharatiya Janata Party-led National Democratic Alliance has raised concerns about a potentially slower pace of fiscal consolidation alongside increased welfare spending.Such a scenario could pose a risk to India’s inflation and monetary policy outlooks over the medium to longer-term. Though fiscal consolidation prospects remain intact, the pace of debt reduction could slow in the wake of the election results, Moody’s (NYSE:MCO) ratings told Reuters.All but one of 72 economists in a May 17-30 Reuters poll expected India’s Monetary Policy Committee (MPC) to hold the repo rate steady at 6.50% at the conclusion of its June 5-7 meeting. Most economists believe the 6.50% rate is the peak of the current monetary cycle.”RBI view is based on macro fundamentals. Given that inflation remains above target levels, RBI is expected to remain on pause. Strong growth conditions provide policy space to remain focused on inflation,” said Gaura Sen Gupta, chief economist at IDFC First Bank (NASDAQ:FRBA).The MPC last changed rates in February 2023, when the policy rate was hiked to 6.5%. Annual retail inflation rose at a slower rate of 4.83% in April, from a gain of 4.85% in March but was still well above the MPC’s 4% medium-term target.”We expect the MPC to extend the pause of rates in June, with an unchanged policy stance,” said Radhika Rao, an economist with DBS Bank in Singapore.”An 8% GDP growth print, above-target inflation and uncertainty over the U.S. Fed’s direction is expected to keep the RBI MPC comfortable in its stance at this juncture,” she added.GDP data last week showed the economy expanded at a faster-than-expected pace of 7.8% in the March quarter, taking the South Asian nation’s full year growth to 8.2%.Though markets have largely factored in a ‘no surprise’ policy on Friday, there is an outside chance of a change in policy stance to neutral, a handful of analysts believe. If the MPC does change its stance to ‘neutral’ from ‘withdrawal of accommodation’, bond yields are expected to fall, in hopes of an earlier rate cut than anticipated.”We think that the committee will lay the foundation for policy easing by officially changing its policy stance,” Capital Economics said.”We think the easing cycle will begin in August and we expect slightly more rate cuts by the end of the year than the consensus is forecasting.” More

In an interview with the Frankfurter Allgemeine Zeitung newspaper, Keller-Sutter was asked whether rules to deal with banks deemed “too big to fail” need to be standardised internationally so that such lenders can be wound up.Keller-Sutter said she was in contact about that with the Financial Stability Board, a body that monitors the global financial system, and other finance ministers, including Germany’s Christian Lindner, who she is meeting in Berlin.”I’d like to raise awareness that winding up (a bank) may sometimes not be possible due to international legal risks. In the case of Credit Suisse, that was clearly a risk,” she said, referring to the Swiss bank that collapsed last year.”There are considerable doubts that recapitalisation via compulsory participation of creditors, that is, a “bail-in”, would work,” Keller-Sutter said.”I’m looking primarily at the United States. The big banks are heavily invested there. That’s why American supervisory authorities would have to agree to a winding up.”Managing this risk is why the Swiss government wanted systemically relevant banks to back their foreign subsidiaries with up to 100% equity, she said.”The equity backing of the foreign subsidiary must be so large that it can be sold or liquidated in a crisis without damaging the Swiss parent company. That was exactly the problem with Credit Suisse,” she said.The demise of Credit Suisse roiled financial markets and led to its takeover by long-term rival UBS, prompting the Swiss government to set out its own measures for too big to fail entities in April.UBS formally absorbed the parent company of Credit Suisse last week. Ratings agency S&P on Tuesday revised up UBS Group AG (NYSE:UBS)’s outlook to stable from negative, saying that “tail risks from the group’s integration and restructuring have eased”. More

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The Swiss franc and yen were also beneficiaries of the sentiment, with the yen receiving an extra boost after Bloomberg News reported the Bank of Japan was likely to mull cuts to bond buying at its policy meeting next week.The yen eased 0.2% to 155.27 in early trade in the Asia session, and hovered at 168.74 to the euro after making 1% jump on the common currency overnight – its largest such rise since Japan intervened in FX markets a month ago.”We would expect to see further yen short covering ahead of the BOJ’s June 14 policy decision,” said Rabobank strategist Jane Foley in a note to clients.Japanese real wages fell for a 25th straight month in April, data on Wednesday showed, as inflation outpaces nominal pay rises. The yen is the worst-performing G10 currency this year, by some margin, and on Tuesday BOJ Deputy Governor Ryozo Himino said the central bank must be “very vigilant” to the impact the currency’s weakness could have on the economy and inflation.The Swiss franc rose for a fourth straight session on the dollar overnight and at 0.8902 per dollar is close to breaking through its 200-day moving average. Other majors eased slightly on the dollar even though U.S. bond yields fell. [US/]The euro was steady in the Asia session at $1.0878 and sterling bought $1.2770, both a little softer than they had been a day earlier. The Australian dollar was a tad weaker at $0.6443 with Australian GDP data due and Westpac forecasting annual growth at just 1%, which excluding the pandemic years would be the slowest pace since 1991.Australia’s top central banker told parliament that growth in the March quarter was expected to be weak as high interest rates work to restrain demand.The New Zealand dollar was steady at $0.6173, while the Canadian dollar held the middle of a months-long range at C$1.3678 per dollar.Markets are pricing a 75% chance of a 25 basis point rate cut, which would be the first among G7 nations in this cycle, and traders will be looking for signals that further cuts are coming. U.S. services ISM and partial jobs data are also due.Emerging markets, meanwhile, have had a turbulent few days.India’s rupee shot to a seven-week low after voters returned Narendra Modi on a much slimmer margin than had been expected.South Africa’s rand has wobbled after the African National Congress lost its parliamentary majority for the first time in 30 years.And the Mexican peso has tumbled more than 4% on the dollar and nearly 6% on the yen since the ruling left-wing Morena party was re-elected and, in coalition, was within reach of two-thirds majorities in both Congress chambers.Heavy selling of the peso against the yen showed investors pulling back on one of the most popular “carry” or interest-earning trades, said Pepperstone’s head of research Chris Weston, as the outlook for Mexico’s currency is uncertain.”The trigger … has been the pricing that the Morena party’s majority in Congress (means a) mandate to push forward with major structural reforms and see greater government control over businesses and the economy – a factor that potentially reduces Mexico’s standing as an international hub.” More