Market Drivers September 6, 2016

RBA remains stationary
EUR Factory Orders miss
Nikkei 0.26% Dax -0.11%
Oil $45/bbl
Gold $1330/oz.

Europe and Asia:
AUD RBA on hold at 1.5%
EUR GE Factory orders 0.2% vs. 0.5%

North America:
USD ISM Services 10:00

The Reserve Bank of Australia kept rates on hold as expected, leaving the benchmark rate at 1.5% and generally maintaining a neutral posture in its statement.

The RBA noted that, “In Australia, recent data suggest that overall growth is continuing, despite a very large decline in business investment, helped by growth in other areas of domestic demand and exports. Labour market indicators continue to be somewhat mixed, but suggest continued expansion in employment in the near term.”

The central bank added, “Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.”

Overall the policymakers in Sydney appeared content to keep the rates on hold for the time being as the economy in Asia Pacific region is growing at a steady pace buoyed by stabilization in Chinese demand. The Aussie rallied ahead of the report, saw very little reaction to the news and then proceeded to move higher when London dealing came on line. The pair moved through the .7650 level as appetite for carry continued.

Tomorrow the market will get a glimpse of Australian GDP data, but given the generally sanguine tone of today’s RBA rate announcement, traders surmised that the GDP data should come in line at very worst. That’s likely to keep the Aussie bid in the near term, but the unit longer term direction is likely to be determined by the Fed rather than RBA.

If the Fed remains stationary in September, keeping US rates at 50bp, the yield differential between the Aussie and the dollar will not compress and that is likely to keep the Aussie bid for sometime pushing the pair above the near term highs of .7700 as carry traders plow into the pair for some last minute end of the year yield gathering. If however, the Fed moves the Aussie is likely to trade back towards .7400 as profit taking kicks in.

Meanwhile elsewhere the calendar is quiet with only German factory orders data out so far showing a slight miss at 0.2% versus 0.5% eyed. The data from Germany continues to show some warning signs of a slowdown especially in the manufacturing sector and given the fact that Germany is the engine of growth for EZ, this week’s ECB meeting may take note of that development.

In North America today the market will get the release of ISM Non-Manufacturing, but the report this month comes out after the NFP data so it unlikely that it will have much of an impact on trade unless it misses badly on the headline basis just as the ISM Manufacturing did last week. USD/JPY is already under some pressure in Asian session trade today after advisor to Japanese Prime Minister Abe, Koichi Hamada suggested that the BOJ hold off any action at the September meeting because any move would be overshadowed by the Fed a few hours later. Any significant miss in ISM data could drive USD/JPY below 103.00 as the day progresses.

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