A Barrage of Soft Euro Data
The euro fell on the back of weaker than expected German PMIs – both the manufacturing and the services surveys disappointed. Thirty minutes later, all three components of the German IFO also came in soft, triggering a further round of euro selling. Finally, adding to the downside pressure, Eurozone manufacturing and services PMIs also fell short of expectations. The absence of any hint of an improving trend in European economic data reinforces our conviction that EURUSD is likely to drift lower over time, given the likelihood of continued US data outperformance. The Australian dollar did not succumb to the risk-off mood however. Earlier, inflationary pressures in Australia during Q3 were found to be considerably higher than consensus expectations. AUDUSD rallied 20 pips on the numbers, and got a second boost when a private sector flash PMI estimate for China registered a substantial improvement on the September reading. Our Australia economics team sticks to its view that another 25 bp cut from the RBA is likely in November, but they now acknowledge that it is a closer call. The rates market is currently pricing in 15 bp of easing for that meeting, down from 19.5bp before the CPI release. We do not expect any material changes to the policy statement at today’s FOMC decision, and we are not alone – even the FX options market (which habitually overestimates the significance of such events) is pricing in very little chance of a market moving outcome. The subsequent meeting on Dec. 12 is likely to be a very different affair however, and our US economists anticipate the pace of Fed balance sheet expansion will accelerate at that point – but just not today. ECB President Draghi is scheduled to have a closed-door meeting with the German lawmakers specifically regarding the OMT, followed by a press conference. The BoC’s monetary policy report and BoC Governor Carney’s press conference will probably offer further insights into the decision not to drop the explicit tightening bias in Tuesday’s policy statement. We do not expect any significant shift in stance at today’s first policy decision by newlyappointed RBNZ Governor Wheeler.
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank