Awaiting Final Italy Austerity Budget Vote, Bank Test Results

Investors await second Italy austerity vote and stress test results, Eurozone trade data, Bernanke backtracks on QE3 talk as S&P also warns on US rating, US CPI and industrial production. Westpak sees RBA rate cuts. We have new Premium Trades for Friday, including 2 on USDJPY.

As a rollercoaster of a week draws to a close the uncertainty that has been the hallmark of this trading week could well continue into the weekend. Todays release of Euro zone May trade data is likely to show that the monthly trade deficit seen in April is likely to have increased to 3.2bn, from 2.9bn. This however will probably take a back seat when compared to the main factors that have been driving events this week, when if all goes well, Italy will draw a line under a turbulent week by getting the final vote of its austerity budget through the lower house of its parliament, after it was ratified by the Senate yesterday.

There is a minor concern that a spanner could be thrown into the works by the opposition who declared earlier this week they would vote it down if it were made a confidence vote, which is precisely what the government has done. Italian bond yields continue to remain elevated and with 10 year yields still above 5.5%, nearly 60 basis points higher in the last 10 days, concerns about Europes third largest economy look set to dominate for some days to come.

Later this evening the results of the bank stress tests will be revealed and according to ratings agency Moodys up to 26 banks out of the 91 tested could well need some form of recapitalising if the tests are carried out properly. The truth is the number is unlikely to be anywhere near that, which throws into question as to how credible they are, just like the tests 12 months ago.

The fact is given the current paralysis at the heart of policy in the euro zone, a stringent test would throw up more questions than answers, given the lack of a current coherent strategy amongst EU leaders.

WESTPAC SEES RBA RATE CUTS in DECEMBER. The large Aussie bank makes a startling change of foeicast (according to MNI FX Bullets), expecting 100bps of rate cuts to start in December 2011 into end of 2012. Westpac explains: "while catalyst for the first rate cut is likely to come from offshore we do not expect it to be a one off. Interest rates are too high in Australia

given the state of the non-mining sectors of the domestic economy and a

downward adjustment is required".

The US dollar has pared back some of its recent losses after Fed chairman Bernanke toned down his comments about further policy stimulus, suggesting that with the economy in its current condition there was a question mark as to whether it would be appropriate. There still appears to be no progress with respect to the debt ceiling negotiations, despite Moodys warning on Wednesday night and overnight confirmation talk that S&P has followed suit. There is talk of about $1.5trn cuts that have been agreed by all parties but that President Obama is pushing for more. Treasury secretary Timothy Geithner has warned Congress that there is no way that the decision can be delayed.

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US economic data due out later today includes June CPI which is expected to fall back, while we also have June Industrial production as well as July Empire manufacturing and Michigan confidence data.