The USD index has continued to decline weighed down by lingering doubts on the US's future as dominant reserve currency. In tune with USD weakness gold continues to forge ahead buoyed also by very tenuous fears of inflation. Sterling and the EUR have both pushed higher against the ailing USD ahead of today's key BoE and ECB policy meetings. The AUD has managed to rise even higher aided by a much better than expected labour market report.
The decision by the RBA to hike rates earlier this week focused market attention on an economy which not only avoided technical recession this year but also boasts a healthy banking sector. The unexpected 40.6K rise in Australian employment in September and a coincident reduction in the unemployment rate to 5.7% from 6.0% in August takes the optimism surrounding it economy one step further and highlights the risk that the RBA may be inclined to hike interest rates again before the end of the year. The AUD surged across the board on the labour market release with AUD/USD pushing to a high of 0.9046 in European hours.
The pound has shrugged off its recent weak tone ahead of today's BoE policy meeting with cable rising back above the 1.600 level and EUR/GBP falling temporarily below the 0.9200 level at the European open. The news that Lloyds Banking group is considering a rights issue which could allow it to fully withdraw from the government's asset protection scheme may have lend some support but model buying and short-covering have been associated with the move in the pound this morning.
The consensus is expecting no change in policy from the MPC today. While the possibility of a step up in QE is still on the table, this is not seen to be a risk until the November meeting which will coincide with the publication of the Quarterly Inflation Report. There is some speculation that the BoE may pare back its dovish tone though this would be inconsistent with the most recent comments from Governor King that it will be a long hard road to economic recovery. Given the heavy impact that comment's from Governor King have had on the pound of late it is likely that King will steer clear of any direct reference to sterling. While a steady policy decision may come as a relief to sterling today, in view of this morning's better tone and given the threat of more QE next month, scope for further significant gains may be limited.
There has been some talk this morning that the ECB could adopt a more hawkish tone following its policy meeting. This is being linked with a rise in the European 5y5y forward breakeven rate and indicator which is watched by the ECB. This rise, however, is likely linked with liquidity premiums.
In our view it would be premature for the President Trichet to refer to inflation pressures in the economy given that Eurozone CPI is standing at -0.2% y/y and in view of the continued downside pressure on the consumer from rising unemployment and the pressure on the export sector from the strength of the EUR (the trade weighted EUR has risen around 6% over the past year). Some reference to exit policies is possible from Trichet today. However, rather than switch to a hawkish tone, there is greater risk that Trichet could repeat the complaint that other currencies should share the brunt of the USD's adjustment lower or he may re-endorse the strong USD policy of the US Treasury.
This afternoon, UK markets will be watching the speech from party leader Cameron at the Tory conference. US initial claims and Canadian housing starts are due.
