GO Markets FX Analysis – AUD buoyant ahead of RBA – 6th November 2012

Following on from Friday, risk trends favoured the perceived safety of the US dollar overnight, with markets transfixed on the presidential election as voters head to the polls this evening (local time). Although Obama’s democrats are odds on favourite to win a second term, preliminary polls suggest candidates Romney and Obama are neck-and-neck, as each candidate makes there last-ditch effort to win over voters yet to decide. Markets are looking at the election in the context of how each party’s respective policy will counter the impending fiscal cliff, referring to the expiration of the bush-era tax cuts in late 2012, and automatic spending cuts as part of the debt ceiling negations. Still, it’s clear should either party slip through by a narrow majority, the same elongated process of negations and political brinkmanship surrounding the fiscal cliff will once again put sentiment in jeopardy. US economic data overnight showed the ISM non-manufacturing gauge fell short of estimates with the index easing to 54.2 from a previous 55.1. Economists’ had anticipated an index reading of 55.

Across the Atlantic, Greece’s plight to win their next bailout instalment began to take its toll on sentiment, with Prime Minister Antonis Samaras set to put to parliament a package of reforms needed to secure the next tranche of bailout funds. The vote will consist of a package agreed with the troika on the 2013 budget cuts and is expected to receive the votes needed in parliament, albeit by a narrow margin. The Euro endured its third consecutive day of losses with a break to the downside of critical support at $US1.28, signalling bearish momentum. Nevertheless, there remains an element of faith that Greece will receive the much need bailout funds and Spain will eventually seek financial assistance.

A$ bucks the trend

The Aussie dollar bucked the trend, holding onto yesterday’s gains in the domestic session. Underpinning the Australian dollar’s buoyancy is a pick-up in data points both locally and abroad which has offset previously near-certain odds the RBA will slice 25bps off the cash rate at today’s meeting. Local data yesterday showed retail sales increased 0.5 percent in September from a previous 0.3 percent rise, up slightly higher than consensus estimates of 0.4 percent. Australia’s trade deficit narrowed to seasonally adjusted AUD1.456 billion in September, from a revised 1.876 billion in August. Economists had anticipated a slightly larger deficit of AUD1.550 billion. Nevertheless, in a less than encouraging prelude to this Thursday’s official employment data, Jobs ads slid in October according to the monthly report compiled by from ANZ which showed a fall of 4.6 percent from -3.9 percent in September. The finer points of the release shows ads for new employment opportunities were down Australia wide, including in Western Australia which is heavily weighted towards mining-related jobs.

Expectations of RBA rate cut pared back

On the local docket today will be the much anticipated RBA policy decision at 1430 AEST, and the outcome at this juncture is as speculative as picking the Melbourne Cup winner which takes place 30 minutes after. In light of a the recent pick-up in indicators both locally and abroad, we’ve seen rate cut expectations pared back considerably, but overall majority of economist’s anticipate a 25bps rate cut. Money markets imply a 50-55 percent change of rate cut today, down from near 90 percent change the week before, helped by a series of news pieces in the local financial press highlighting the decision will be finely balanced. Nevertheless, if financial bookies are any guide, the RBA will today sit on their hands, with a ‘hold’ decision now odds on favourite.

There of course remains a valid case to suggest the a rate cut is on the agenda, one of which is Stevens and the board have displayed previous form, either raising or cutting rates at every Melbourne Cup day decision in the last six years. This suggests the board may decide to take some insurance by tweaking the cash rate lower, with November considered the best month to make final adjustments ahead of the holiday season in December and a break in January. While its apparent the RBA have well and truly left the door ajar for another rate cut,  the recent stronger than anticipated local inflation pulse and stronger growth indicators from China, makes the case for the board to hold rates steady on Tuesday more compelling. Perhaps we can glean an indication from a speech last week from Deputy RBA Governor Philip Lowe who painted a fairly positive picture of local conditions, noting “Australia has had the highest level of investment, relative to GDP, in over a century, and a further increase is expected.” Dr Lowe acknowledged tentative signs that growth in China has stabilised in light of the recent pick-up in growth indicators, while noting central bank and government decisions in the Euro region have “lessened the probability of a very adverse outcome.” While it’s hardly a smoking gun, we consider this a gentle upgrade from recent – more dovish – feedback from the bank.

Daily range: 102.8 | 104.2 US cents

Speculation aside, the only thing assured from a currency perspective is volatility, given the now evenly balanced expectations surrounding the decision. Markets have suitably priced in even odds leaving plenty of leeway for a jolt in either direction from the Australian dollar. Still if the bank holds rates steady, offers above 104 US cents will slow the momentum, and previous attempts to flush out sellers have proved unsuccessful. In this case we anticipate resistance at 104.20 to contain short-term buying before the European handover. On the flip side, broadly supportive behaviour displayed between 103-figure and 103.15 US cents should slow a descent. Depending on how the ensuing statement is interpreted, a deeper short-term decline to 102.8/9 US cents may be seen.



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