Market Drivers November 5, 2019
Risk on flows continue
RBA hints no more cuts
Nikkei 1.76% Dax 0.14%
UST 10Y 1.82%
Europe and Asia:
AUD RBA stays on hold
GBP UK Services PMI 50 vs. 49.6
USD ISM Services 10:00
Another positive night for risk assets in the currency market as traders were buoyed by news that US-China talks were progressing on target and that the US may lift the 15% tariffs on China goods imposed in September.
The Sino-American thaw had its biggest impact on AUDJPY which hit fresh highs not seen since July as risk sentiment continued to improve. The Aussie was also boosted by a surprisingly hawkish RBA statement which hinted that it may not cut rates any further for the foreseeable future.
In its statement, the RBA noted that a “gentle turning point” has been reached in the economy indicating that it feels conditions have stabilized for now. Markets are still pricing in a 24% chance of a rate cut by December and a 50% chance of a cut in 2020, but if US-China trade relations come to a detente those odds are likely to fall and Aussie could make a run at the key .7000 level as the week proceeds.
Elsewhere the UK PMI Services printed slightly better than forecast at 50 vs. 49.6. According to Markit, “The UK service sector registered no change in output in October compared with one month previously, according to the latest IHS Markit / CIPS PMI® survey data. Although this represented a slight improvement on September’s contraction, business levels were supported by existing contracts as the volume of new work declined further. This led to more job losses in the sector, albeit at a slower rate. The outlook improved slightly as a number of firms expected Brexit to be resolved early next year, reducing uncertainty, but overall sentiment remained historically weak.”
Cable climbed back above the 1.2900 mark in post news reaction as the existential threat of hard Brexit continues to dissipate creating a modest rebound in UK business activity and sentiment. The pair still remains contained by the 1.3000 level and volatility has certainly compressed but the overall bias remains bullish as some sort of Brexit resolution appears likely.
In North America today the only data point of note will be the ISM Non-Manufacturing report. With the market already tilting towards a positive risk bias any upside surprise could be enough to push USDJPY through the 109.00 figure and set up a test of the key 110.00 level. The true test of risk flows, however, will be the reaction to any miss in the data. If FX traders shrug off any bad news the longer-term trend for USDJPY will turn decidedly bullish.