RBA Holds with Solid Data Supporting the USD as Uncertainty Continues to Rain on the EUR and GBP

Earlier in the Day:

Macroeconomic data through the Asia session was on the lighter side, with stats limited to New Zealand’s NZIER Business Confidence Index for the 3^rd quarter, together with housing sector stats out of Australia and the all-important RBA interest rate decision and release of the accompanying rate statement.

For the Kiwi Dollar, business confidence slumped from 18% to 5% in the 3^rd quarter, largely attributed to uncertainty over the General Election, which has left the National Party negotiating to form a coalition government.

With only 5% of companies surveyed expecting business conditions to improve through the 3^rd quarter, there’s certainly more evidence that the RBNZ may need to provide further support to the economy, as other central banks look to shift to a path towards normalization. It’s too early to panic, with General Elections having a tendency to weigh on business confidence, while the RBNZ will likely welcome the softer Kiwi Dollar, which is down a further 0.24% to $0.7178 at the time of the report.

The recent U.S Dollar rally will also be embraced by the RBA, who has continued to raise concerns over Aussie Dollar strength. The RBA held rates unchanged this morning, which was in line with market expectations, while the RBA statement provided a boost for the AUD, with salient points from the statement including:

• Australia’s terms of trade are expected to decline in the period ahead, but remain at relatively high levels.
• Employment has continued to grow strongly over recent months, accompanied by a rise in participation rates, with continued improvement in hiring expected in the period ahead.
• Wage growth remains low and is likely to remain so for a while yet, with inflation also remaining low and expected to pick up gradually as the economy strengthens.
• Australian Dollar appreciation is expected to contribute to continued subdued price pressures in the economy and is also weighing on the outlook for output and employment, with an appreciating exchange rate expected to result in a slower pick-up in economic activity and inflation than currently forecast.
• Growth in housing debt has outpaced household income growth, with a tightening in credit conditions contributing to a slight slowdown in borrowing by investors recently.

The statement certainly fell short of anything hawkish, with the RBA seemingly unwilling to send the Aussie Dollar on a ride, which ultimately brought the Aussie Dollar down from $0.78124 to $0.77970 upon release of the statement.

This morning’s housing sector data was relatively upbeat, with new home sales surging 9.1% in August, more than reversing July’s 3.6% slide, with building approvals up by 0.4%, following a revised 1.2% decline in July. Despite the positive numbers, a response by the AUD was relatively subdued ahead of the RBA decision, the markets unsure of whether the tone of the RBA statement will be in line with the recently hawkish speeches delivered by the RBA governor.

In the equity markets, the continued slide in the Yen saw the Nikkei make solid gains with the Hang Seng on a tear as it played catch up following Monday’s close, while the ASX200 bucked the trend, sitting in the red ahead of the RBA decision.

At the time of writing, the Yen was down 0.21% at ¥113.01 against the Dollar, with the AUD down 0.11% at $0.7818, recovering from an Asian session low $0.7786.

The Day Ahead:

It’s a relatively quiet day ahead on the economic calendar, with no material stats scheduled for release out of the U.S this afternoon to test the Dollar, which has found a new lease of life, supported by some impressive September manufacturing data released on Monday, with the ISM Manufacturing Survey reporting a broad based pickup in activity as 17 of the 18 sub-sectors surveyed reported growth, the PMI hitting levels not seen since 2004.

The near-term effects of Hurricanes Harvey and Irma may appear in next month’s data, but for now the U.S economy looks set to deliver this year, despite the U.S administration having done little to support growth.

In stark contrast to the Dollar, both the EUR and the Pound have struggled going into the 4^th quarter, with the EUR’s $1.2036 1-year high a distant memory for now as rising geo-political risk continues to overshadow an expected shift in ECB monetary policy in the coming months.

If the markets were of the impression that Merkel’s troubles were over, the latest polls show Merkel’s CDU and main opposition party, the SPDs to be almost tied ahead of the state of Lower Saxony regional election, with voting to take place on 15^th October. The general consensus is that coalition negotiations may well be delayed ahead of the vote, the main parties wanting to avoid losing voter support that could stem from any compromises made during coalition talks.

The good news is that a recent survey showed that 59% of voters were in support of Merkel forming a coalition with the FDP and the Greens, though few expect a coalition to be formed before the end of the year, which is likely to continue to test appetite for the EUR, particularly with the Catalan independence referendum raising uncertainty over what lies ahead for Spain.

Macroeconomic data out of the Eurozone this morning is limited to Spain’s unemployment change figures, which are unlikely to have a material impact on the EUR, with the markets more focused on the political arena for now and some may well argue that there could not be a better time for the ECB to roll out its plans for the asset purchasing program.

From the UK, stats are limited to September’s construction PMI, with the Pound having seen a sharp decline on Monday, following the softer manufacturing PMI numbers. While the Pound had found some interest in the last week, following some hawkish commentary from the BoE Governor, any moves in the coming months are data dependent and softer PMI figures will raise question marks over whether the UK economy is beginning to run out of gas as it continues to negotiate its passage out of the EU.

Soft numbers this morning could see the Pound begin to make a move towards $1.31 levels, particularly if tomorrow’s service sector PMI figures disappoint. It was just a week or two ago when the Pound had rallied back to $1.36 levels.

It’s going to be tough to go against the Dollar for now and with FOMC voting member Harker scheduled to speak this afternoon, some hawkish commentary will likely cement the Dollar’s gains ahead of tomorrow’s ADP nonfarm employment change and more importantly Friday’s wage growth and nonfarm payroll numbers, both needing to be positive for the FED hawks to have an influence on rates before the end of the year.

At the time of writing, the Dollar Spot Index was up 0.15% at 93.697, while the EUR and the GBP recovered from early losses, the EUR up 0.03% at $1.1737, with the Pound up 0.08% at $1.3286.