The buck rallied smartly in what was a relatively quiet NY trading session.  EUR/USD plunged -190 pips to 1.2640/45 after testing the 1.2600 zone multiple times.  GBP/USD meanwhile shed an additional -320 points and was sitting near the 1.5820 mark after making a high today near the 1.6390/1.6400 zone.  USD/JPY added 40 pips despite a lackluster equity market performance that eventually saw US equities end the day about flat.  EUR/JPY was not as fortunate and was pummeled about -140 pips to a 125.30/35 close.  With the US election results due tomorrow evening, tomorrow's early market action will likely be similar.

The gains in the buck were despite poor economic data.  US auto sales plunged to a gloomy 10.6 million unit annual rate in October after a 12.5M run rate the prior month.  This is the worst result since the 1980s.  Meanwhile, manufacturing activity officially entered recession terrain as the ISM index plunged to 38.9 in October from 43.5 prior.  This took the index below the 42.5 average it has registered in periods of US recessions since 1948.  This is just added confirmation that US economic activity in 4Q will be dismal and that we will likely see a sharp contraction in US GDP.

The Reserve Bank of Australia will decide on rates at 0330GMT. The market is looking for the bank to reduce rates by -50 bps on top of the -100 bps unscheduled cut in early October. Commodities, which are central to the Australian economy, continued to decline and fell a whopping -24% in the month of October. The continued slowing in global growth has the potential to push commodity prices even lower as we head into 2009. Given this looming risk, we believe the bank will be proactive in cutting interest rates in order to stimulate the economy.

However with inflation still seemingly a problem, the current forecasts for a terminal rate of 4.5% by the middle of next year are likely too optimistic. We expect the market reaction from a -50 bps cut will be to sell AUD initially only to see a reversal shortly thereafter. Should the RBA decide to frontload the cuts and slash rates by a more aggressive -75 or -100 bps then the selling in AUD would be more intense and in this case sustained.  Stay tuned!

Upcoming Economic Data Releases (Asia Session)   Prior   Estimate

  • 11/4/2008 1:30 GMT JN Labor Cash Earnings YoY SEP -0.30% 0.20%
  • 11/4/2008 2:00 GMT NZ ANZ Commodity Price OCT -4.90% - -
  • 11/4/2008 3:30 GMT AU RBA CASH TARGET 5-Nov 6.00% 5.50%
  • 11/4/2008 5:00 GMT JN Vehicle Sales (YoY) OCT -5.30% - -