Market Drivers October 6, 2015

RBA keps rates on hold
EZ Retail PMI in line
Nikkei 1.00% Europe .14%
Oil $46/bbl
Gold $1137/oz

Europe and Asia:
AUD RBA rates 2.00%
EUR EZ PMI Retail 51.9 vs. 51.4

North America:
USD Trade Balance 8:30

CAD Trade Balance 8:30

CAD Ivey PMI 10:00

The Reserve Bank of Australia kept the interest rate on hold as expected providing a minor boost to the Aussie in what was otherwise a very quiet night of trade in Asia and early Europe.

The RBA kept the benchmark rate at 2.0% noting that, “leaving the cash rate unchanged was appropriate at this meeting.” The move was expected by the market but it nevertheless confirmed the view that Australian monetary authorities remain in wait and see mode for the time being as the country’s economy appears to have stabilized.

In its statement the RBA wrote, “In Australia, the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet, with domestic inflationary pressures contained. Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.”

Although the terms of trade for Australia continue to deteriorate as evidenced by the larger than expected Trade deficit data released tonight, other part of the Australian economy are performing relatively well and the RBA is keen to keep its options open by keeping the rates at current levels which could allow it to lower them should conditions deteriorate markedly next year.

Recently several bank analysts have called on the Aussie to rally in a counter trend move, arguing that the pair is so grossly oversold that a move towards .7500 is likely as short covering takes hold, We think such targets are optimistic given the depressed state of prices on the commodity front. However if commodity price staged a mild rally into the year end the Aussie could certainly follow, especially given the fact that the Fed is unlikely to move until December the earliest, providing ample time for carry trade speculators to lock in the spread which is unlikely to compress between now and year end.

Elsewhere the price action was very muted with little data on the economic calendar to move .markets. Today in North American session the only report on the docket is the Trade Balance data which is unlikely to have much impact on dealing. It appears that makers will continue to trade on risk on/risk off flows with currencies once again taking their cue from equities. USD/JPY has staged an impressive recovery off Friday’s lows and if equites put in another positive day it could challenge key resistance at 121.00 level as the day proceeds.

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