All Eyes on Draghi and the EUR as the RBA Holds

Bob Mason
Mario Draghi
Mario Draghi

Earlier in the Day:

There were no material stats released out of the Asian session this morning, leaving the markets to focus on the RBA monetary policy decision and rate statement.

Recent data out of Australia had left sentiment towards the Australian economy and monetary policy mixed. While interest rates were left unchanged at 1.50%, the rate statement certainly gave the Aussie Dollar an initial boost, rising from $0.76808 to $0.76941 upon release of the statement.

Key points from the statement were as follows:

  • Global economic conditions continue to improve, with above-trend growth expected in a number of economies.
  • Economic growth in China is being supported by increased spending on infrastructure and property construction, with high debt levels continuing to present a medium-term risk.
  • Australia’s terms of trade are expected to decline in the period ahead but remain at relatively high levels.
  • Bank forecasts for GDP growth unchanged and expects GDP growth to pick up to average around 3% over the next few years.
  • Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has also improved.
  • Increased public infrastructure investment is also supporting the Australian economy.
  • Uncertainty remains over the outlook for household consumption, with household incomes growing slowly, while debt levels are high.
  • Labour market conditions continued to strengthen, with forward-looking indicators continuing to point to solid growth in employment.
  • The unemployment rate is expected to decline gradually from its current 5.5%.
  • While wage growth remains low, improving labour market conditions should lead to a lift in wage growth over time.
  • Inflation remains low and the Bank’s central forecast remains for inflation to pick up gradually as the economy strengthens.
  • Australian Dollar appreciation is expected to contribute to continued subdued price pressures in the economy and also weigh on the outlook for output and employment.
  • Growth in housing debt has been outpacing the slow growth in household income for some time. Measures have been introduced by the APRA to address this, with credit standards having also been tightened.
  • Housing market conditions have eased further in Sydney, whilst rising in Melbourne and largely unchanged elsewhere.
  • The low level of interest rates is continuing to support the Australian economy.

While there were no suggestions of a shift in policy, the general outlook on the economy and expectations of inflation to begin picking up were hawkish from the markets’ perspective. The very fact that the RBA recognises the degree of support from the current interest rate environment supports the no change view on monetary policy. Concerns over housing debt are all too evident recently and a lift in rates would likely hurt already weak consumer consumption further.

At the time of the report, the Aussie Dollar coughed up the gains sitting down 0.13% at $0.76881.

The Day Ahead:

It’s another relatively quiet day on the economic calendar, with key stats out of the Eurozone limited to Germany’s Industrial Production figures for September and the Eurozone’s retail sales numbers.

Following Germany’s factory order numbers released on Monday, production numbers may come in ahead of forecasts, which could provide the EUR with support, with retail sales also expected to recover from August’s decline. While the stats may be EUR positive, the markets will be looking out for comments from ECB President Draghi, also scheduled to speak this morning. Any dovish commentary will likely reverse any intraday gains, the ECB President unlikely to talk up the EUR. October’s prelim inflation figures were disappointing enough for the ECB to maintain its dovish tones.

At the time of the report, the EUR was down just 0.02% at $1.1608, with a return to sub-$1.16 levels more than likely should Draghi discuss monetary policy.

For the Pound, stats through the day included October’s BRC Retail Sales Monitor numbers, which disappointed in the early hours of this morning, falling 1% against a forecasted 0.9% increase. The figures follow on from some quite dire government retail sales data for September, a concern for the BoE.

House price figures later this morning are unlikely to have a material bearing on the Pound, which continues to be jostled by sentiment towards Brexit and BoE monetary policy. At the time of writing, the Pound was down 0.03% at $1.3167.

Across the Pond, it’s another relatively quiet day, with September’s JOLTs job openings the key stat for the day. With nonfarm payrolls and wage growth having been on the softer side in October, the markets will be looking for the job openings numbers to be solid. The weak numbers had been attributed to lingering effects of Hurricanes Harvey and Irma. Should we see the JOLT’s numbers disappoint, we would also expect the Dollar to soften.

With no other key stats for the markets to consider, the Redbook will also be an influence this afternoon, as the markets look for a pickup in momentum in the U.S economy, which certainly performed better than anticipated in the 3rd quarter.

At the time of writing, the Dollar Spot Index was up 0.02% at 94.772. While the data will be a factor, the markets will also need to consider any noise from Capitol Hill and Trump’s tour of Asia.

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