Market Drivers Nov 03, 2015

RBA holds rates steady AUD pops to 7200
UK Construction PMI tad softer
Nikkei closed Europe -0.14%
Oil $46/bbl
Gold $1133/oz

Europe and Asia:
AUD RBA 2.00% held
GBP Manufacturing PMI 58.8 vs. 58.9

North America:
USD Economic Optimism 10:00

The Reserve Bank of Australia kept rates on hold at the 2.00% level providing a boost for AUD/USD which popped above the 7200 level in late Asian trade.

In its communique the RBA sounded a decidedly more hawkish tone noting that financial market volatility had improved over the past month. While the RBA acknowledged that conditions in China suggest further softening, the slowdown in Asia was partially offset by continuing growth in US and recovery in Europe.

The central bank also dismissed concerns about the recent rise in mortgage rates noting that credit conditions remain accommodative and while Mr. Stevens and company noted that inflation is low they nevertheless insisted that it was within the target range and saw no threat of disinflationary pressures.

In short the RBA dismissed almost all the arguments of Aussie bears suggesting that the central is likely to keep rates on hold for the foreseeable future unless economic conditions deteriorate rapidly. One key report that is sure to factor in their decision making is the AU employment report due next week. If joblessness accelerates markedly, the market will begin to price in the prospect of easing for December. However, if job picture remains steady, there seems little chance that RBA will act before the year end.

One key reason for their lack of urgency is the low exchange rate of the Aussie which continues to tread water in the low 7000’s. The RBA made a particular effort to note that the lower exchange rate is helping to rebalance the economy from mining to more services led growth. As long as the Aussie remains within these levels the RBA may continue to believe that the lower exchange rate doing the work of accommodation in place of lower rates.

For Aussie bears the path to lower exchange rates may now lie only with the Fed. The market will therefore focus even more intently on US data due this week. Today however is the lightest day in the calendar with only Factory Orders and Economic Optimism on tap. That suggests we may have another range bound day of trade with a slight dollar bias as market prepare for an avalanche of releases starting tomorrow. If the data proves “good enough” for markets to conclude that a December rate hike is coming, the dollar rally could quickly gain momentum.

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