Australia's RBA setting up for a November hike in tonight's meeting?


MAJOR HEADLINES – PREVIOUS SESSION

  • Australia Sep. AiG Performance of Services out at 49.3 vs. 48.0 expected

  • Germany Sep. Final Services PMI out at 52.1 vs. 52.2 original estimate

  • EuroZone Sep. Final Services PMI out at 50.9 vs. 50.6 original estimate

  • UK Sep. Services PMI out at 55.3 vs. 54.5 expected

  • EuroZone Aug. Retail Sales out at -2.6% YoY vs. -2.4% expected


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • US Sep. ISM Non-manufacturing (1400)

  • New Zealand Q3 NZIER Business Spending Survey (2200)

  • US Fed's Dudley to Speak (2230)

  • Australia RBA Cash Target (0330)

Market Comments:

The USD weakened again late Friday after the market had apparently already priced in enough risk aversion after Wednesday's very negative ADP number, so that the negative Nonfarm Payrolls surprise was actually priced in. The USD limped into the close as equities staged a bit of a comeback. The G-7 offered little help, as it merely issued a milquetoast statement on "disorderly" currency moves being detrimental to stability - essentially a repeat of a statement made in April.

More important for the future is to follow the trajectory of rhetoric such as Weber's mention that there should be talks with "some Asian countries" about their currencies. This issue is at the crux of global imbalances and Mr. Weber is right to worry, as the persistent, renewed USD-pegging by China is what is creating a good deal of Euro demand as they diversify reserves. Euro should be falling against the renminbi, not rising sharply because the USD is weak. There is also something fishy about the Chinese growth story - if the country is growing so strongly again, why not begin to let the renminbi back on its managed float, which would certainly see it strengthening against the USD? Keeping the current repegging regime is aggravating imbalances and is a position of weakness from the Chinese government, not one of strength. There must be fear within the regime that not all is as well as it appears on the surface...

The new Japanese FinMin Fujii moved deeper into the verbal intervention, trying to stem any effect he may have had on the JPY strengthening move of late, as he said that the government would intervene if the JPY were to move in a "biased direction". This type of talk has become almost humorous, though it seemed strong enough to keep the JPY on its back foot for much of today's session. More important for the reversal back to a weaker JPY late Friday was a rather climactic reversal in the steep rally in bonds after they crashed well through the 3.25% level in the US 10-year benchmark. That level now serves as a resistance level for yields and therefore as a resistance level for JPY crosses.

Aussie likely to be volatile tonight with the RBA set to announce its cash target. The last meeting failed to give convincing hints that the bank would raise rates at this meeting, and one has to wonder if the strength of the Aussie plays any part in determining the bank's course of action. A majority are likely looking for a November hike going into the meeting, though a growing minority are looking for a hike tonight. So baseline expectation is essentially that tonight's meeting will be a set-up meeting that hints the bank will move, even if the split expectations mean that direction for the Aussie will be either/or tonight. The biggest shock to the downside for the Aussie would come on no real hints on when tightening is to occur.

For now, we look at the ISM non-manufacturing index for market sentiment. It is expected to rise to the 50 demarcation level that divides expansion and contraction for the first time in over a year. The Manufacturing ISM often leads the services PMI, though some might say that it could be a bit different this time around as the collapse in manufacturing has created a need to rebuild inventories that may not follow through to the services side of the economy. In any case, this survey is key, as the services sector is the dominant sector of the US economy. The weak USD trend remains in place until/unless we take out the highs in the USD from last week.

Chart: USDJPY

For USDJPY, we now have a pretty reasonable argument for basing action in place, after the two recent hammer reversal formations, though we need to see good follow through above 90.40 to get confirmation. Back below the recent lows and we're back to the old bear trend. Again, interest rates are in important coincident indicator, especially for the higher beta crosses like AUDJPY, which is guaranteed to be a big mover tonight.

USDJPY