Inflation Slams the Aussie, with GBP and the Loonie in Focus

Earlier in the Day:

Key stats through the Asian session this morning were limited to Australia’s 3^rd quarter inflation figures, which provided yet more disappointment for the Aussie Dollar. The numbers fell short of forecasts, with the annual rate of inflation easing from 1.9% to 1.8% in the 3^rd quarter, despite a quarter-on-quarter pick up from 0.5% to 0.6%, leading the Aussie Dollar to a tumble from $0.77794 to $0.77404 upon release of the data.

The numbers provide further reason for the RBA to stand pat on monetary policy over the near-term, with household debt and weak wage growth other concerns for the RBA to continue to factor into their policy outlook and, while the risk on sentiment was favouring the Aussie Dollar ahead of this morning’s stats, we can expect the markets to be a little wary with a narrowing in yield differentials going against the Aussie Dollar.

Elsewhere, the Kiwi Dollar’s demise continued with no respite in sight ahead of tomorrow’s trade figures, as sentiment towards both the likely coalition government and monetary policy outlook remain negative. The Kiwi Dollar was down 0.10% at $0.6903 at the time of writing, recovering from an intraday low, $0.6882 with the Aussie Dollar down 0.68% at $0.7723.

For the bulls, Asian equities made little ground this morning, with the Nikkei’s record winning streak of 16 straight days of gains coming to an untimely end, the Nikkei ending the day in the red as the Yen recovered from early losses against the Dollar to sit at ¥113.78 at the time of the report, in response to the Asian market’s lacklustre response to the gains in the Dow.

Despite today’s direction, expectations of the Bank of Japan to hold on its current monetary policy, barring any risk off events, will see the Yen continue to ease with the talk of ¥120 levels likely to resurface should Trump deliver on tax reforms and BoJ Governor Kuroda be chosen for another term.

The Day Ahead:

Macroeconomic data out of the Eurozone this morning is limited to Germany’s Ifo business expectations index figures for October, which will provide the markets with further evidence on whether the German General Election has raised any alarm bells for businesses, with Chancellor Merkel’s support having worsened to leave Merkel’s CDU party in 2^nd in the state elections.

Prelim October manufacturing figures were positive out of Germany, according to figures released yesterday, which supports forecasts pointing to no change from September.

While the EUR will respond to the figures, Germany’s economy and business outlook being key to the Eurozone’s economic recovery, focus will remain on tomorrow’s ECB press conference, as the markets await on the Bank’s tapering plans for the asset purchasing program for next year.

The EUR was up 0.03% at $1.1765 at the time of writing, with further gains expected should the risk appetite ease through the European session, following a mixed Asian session.

After a quiet start to the week, the Pound will be back in the limelight this morning with the release of 1^st estimate, 3^rd quarter GDP numbers. Forecasts are for the UK economy to have slowed to 1.4% growth year-on-year and to have grown by 0.3% quarter-on-quarter. The numbers are unlikely to have any influence on sentiment towards monetary policy, while anything short of forecasts will be another blow to the Pound, which has had a pretty bad month of October, thanks to some dire data that has caused the markets to pull back on expectations of a November rate hike.

The Pound was flat against the Dollar at $1.3137 at the time of the report, with anything in line with or better than forecast likely to give a boost on relief that the UK economy has continued to grow despite expectations of a recession in the wake of the EU Referendum.

Across the Pond, stats out of the U.S include September’s pending home sales and more importantly durable goods orders, with the markets expecting manufacturing sector demand to continue to improve as reflected within the PMI figures released in recent months.

Momentum is certainly with the Dollar at present, with the positive sentiment towards the U.S economy and hopes of reforms seeing the Dollar Spot Index up 0.16% to 93.923, though there’s still a long way to go for the Dollar to claw back its losses from the current year, down 8.04% year-to-date.

John Taylor as the FED Chair would certainly help in some of the recovery and the markets will have responded to the reports of Senate Republicans being asked for their preferred candidate in a show of hands on Tuesday, the result favouring the hawkish John Taylor.

With the U.S Dollar on the move in the early part of the day, we’ve seen the Loonie fall further this morning, with concerns over NAFTA having added to the downside for the Canadian Dollar in recent weeks, ahead of this afternoon’s Bank of Canada monetary policy decision. Things were looking upbeat until the release of retail sales and inflation figures last Friday, which disappointed and caused the markets to reassess their view on policy ahead of today’s decision.

As a result of the softer numbers, the probability of a December rate hike fell from an 80% high to less than 50%, which could have left the Loonie undervalued going into today’s announcement with the BoC likely to continue to point towards a December move and maintain its hawkish outlook on policy and the Canadian economy.

At the time of the report, the Loonie was down 0.02% at $1.2678 against the U.S Dollar, with U.S Dollar strength on hopes of tax reforms and rate hikes playing a hand in the recent weakness in the CAD.