DB FX Daily: London AUD capital flows; ECB preview

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FX Daily: London
AUD capital flows; ECB preview
Today's Key Data and Events
EUR Eurozone retail sales for April, DB 0.7%/mkt 0.5% (09:00 GMT)
USD Bernanke to speak (12:15 GMT)
AUD RBA rates announcement DB/mkt no move expected (23:30 GMT)
AUD GDP for Q, DB 1.1%/mkt 1.2% (01:30 GMT)

Upcoming Event Risks
June 6: ECB rate decision
June 7: BoE rate decision, RBNZ rate decision
June 6-8: G8 Summit
June 14: SNB rate decision

AUD remain reliant on debt flows for support
The Australian Q1 current account data were released today, with the headline current account deficit a little wider than expected at A$15.4bn. Underlying the wider than expected deficit was the continuing widening in the net income deficit as a result of the higher returns on Australia's liabilities - especially equities. With company profit growth now moderating though this trend may slow in coming quarters. The data also provide some interesting details as to the capital flow backdrop for AUD. The most striking aspect of the data was the continuing importance of debt flows for financing the deficit - indeed the net debt inflows of A$ 19.9bn more than covered the deficit, and made up for net FDI flows returning to negative territory. This reliance on debt flows has been a consistent trend in recent years, and is likely one reason why AUD is typically so sensitive to movements in interest rate differentials (although this has been less so recently). The equity flow data was perhaps more interesting for what it did not show. With Australian superannuation funds continuing to allocate about one quarter of their funds under management to overseas equities, we have previously noted the risk that any surge of flows into these funds due to a tax window that closes 30 June could provide a potential headwind for AUD. The data released today though reported equity outflows of A$8.4bn, which while above the A$1.7bn of outflows in Q1, was below the A$9.8bn of outflows in Q1 2006. This suggests that the risk of a large headwind for AUD from these flows may not be all that large.

[email]john.horner@db.com[/email]

ECB - focus will be on the press conference
With a rate hike almost universally expected from the ECB when it meets on Wednesday the focus for market participants will be on the statement and press conference. Our Euro-zone economists expect the overall tone to be quite hawkish, although they also think that the market is likely to be disappointed if it thinks that the ECB will offer a view on the risks of 4.5% by year end (see this week's Focus Europe for an in depth discussion of what we expect out of the ECB). With key euro crosses such as EUR/JPY (see chart below) driven by respective rate expectations and the Eurozone debt market largely (but not fully) priced for a move to 4.25% in September, the extent to which the ECB signals an intention to move rates to 4.25% (or beyond) is likely to be key for markets on the day.