– AUD crosses to weaken following unexpected RBA cut; Statement dovish
RBA unexpectedly cut rates by 25bps 3.25 per cent delivering a fairly dovish statement suggesting that further rate cuts lie ahead. The RBA statement was quite dovish on all points, and there was a noticeable increase in concern over the China growth outlook. Importantly, the RBA also indicated that the labour market has generally softened in recent months, looking through the still-low unemployment rate. There assessment of inflation suggests it is less of an issue, and hence the Oct 24 Q3 CPI will likely be less of an issue for the market to continue to price in a rate cut at next month’s (Nov 6) meeting. For FX, This should see AUD remain weak on the crosses, and AUDNZD should progress lower; spot broke below key support on Friday, near 1.2560 (support drawn from the 2009 lows), and the 2-year swap ratio suggests that this cross could continue to grind lower. However, we stress that AUDUSD will not be the best way to trade AUD weakness. Sure, a further correction to the 1.0245/75 region is plausible today, but we judge that broader USD weakness (on QE3) should see spot remain supported. We retain our year-end forecast of 1.0800 given our forecast for broad-based USD weakness in response to open-ended QE.
– EUR driven by expectations for Spain seeking assistance
The EUR has been driven by expectations of a strong ECB response to lower sovereign debt risk premia, something we believe has improved the EUR outlook. However ECB action is dependent on governments (esp. Spain) requesting assistance. So, the day-to-day outlook for EUR will be driven by expectations for when Spain requests formal aid. Overnight, a press report suggested that Spain may have shifted in favour of asking for a bailout, but faced reluctant German leadership that prefers to bring other funding requests from other states to its parliament. Our economists believe Spain is edging closer to asking for aid [See Macro Matters, Spain: Hostage to Catalonia (among other things)] but believe it will be a long, slow process. Following last week’s Spain budget announcement and bank stress test results, the eurospecific focus shifts to next Monday’s (8 Oct) Euro group meeting. The hope is that the Euro group takes a positive view on reform measures, allowing the Spanish Government to spin any bailout as a reward for reform.
– A soft NFP Friday should see USD weakness remain intact
Yesterday’s market reaction to the much stronger US ISM (higher equities, weaker USD) was telling; it suggests the market remains convinced that the strong easing bias (open-ended QE) will remain in place with one data point unlikely to change the picture. In comments yesterday, Fed Chairman Bernanke on Monday reiterated his dovish views, highlighting that current real growth, which stands at 1.5%-2% is not fast enough and will not lower unemployment. Bernanke defended the Fed’s policy against recent criticism that Fed policy threatens future inflation and abets government spending. The rest of the data this week will likely affirm the need for such aggressive policy, but the main focus is firmly fixed on Friday’s NFP report. Another print below 100k, as our economists expect, should keep the USD under pressure. We favour expressing our USD weakness view via long NZDUSD.
– Greece submits budget; ECB on Thursday
Yesterday, Greece submitted a budget to Parliament that includes about EUR 7.8bn worth of austerity measures for next year. The budget cuts come after discussions with troika. Negotiations with the troika continue on the details of the two-year austerity package. This budget is likely to be voted on in December. Meanwhile, Thursday’s ECB meeting will be of some focus this week (our economists look for a move in policy rates in December). With market risks considerably abating since the announcement of the OMT framework, the ECB will feel less pressure to consider additional measures. We continue to see further EURUSD upside; our year-end target stands at 1.35.