With the highly anticipated ECB policy decision now only days away, the theme Euro strength remained in play overnight amid further positivity over the prospects of decisive ECB policy action. It’s been a little over a month since European Central Bank President Mario Draghi inspired a global market rally by vowing to do “whatever it takes to preserve the Euro.” In this Thursdays ECB’s policy decision we will finally learn exactly “whatever it takes” entails, and critically, if it’s enough to get Spain to forgo its sovereignty and agree to a memorandum of understanding in exchange for financial assistance. The Euro remained well bid across the board overnight as markets found solace in reports ECB President Mario Draghi told lawmakers in a closed door meeting purchases of short-term peripheral debt up a 3-year maturity would not be a represent a violation of the treaty under the current legal framework. Investors were encouraged by comments from German Finance Minister Wolfgang Schaeuble who said the German Constitutional court would not block the implementation of the European Stability Mechanism.
The Euro led a charge higher against the Aussie dollar which continued to succumb to fresh concerns over China’s growth prospects and a series of less than inspiring local data points yesterday. Both Monday’s HSBC report and the official release over the weekend suggest manufacturing in China has fallen deeper into contraction territory. China’s official PMI report released over the weekend showed manufacturing slipped below the 50 level for the first time since November 2011. An index level of 50 and above suggests manufacturing is expanding, below signals contraction. Yesterday’s HSBC equivalent fell to 47.6 in August from a preliminarily reading of 49.3 representing the lowest reading since March 2009.
Also in the frame yesterday was an uninspiring retail sales report showing June’s solid increase on the back of government subsidies couldn’t be sustained. Retail sales slumped 0.8 percent in July from a 1.2 percent rise in June against expectations for a moderate rise of 0.2 percent. The fall in the latest ANZ jobs ads report is also seen as a particular negative precursor ahead of Thursday’s official employment print. Yesterday’s release showed job ads fell 2.3 percent in August from a fall of 0.8 percent in July.
The day ahead will see the RBA policy meeting take centre stage at 14:30 AEST which is widely expected to see interest rates remain on hold at 3.5 percent. Nevertheless, after a series of sub-par economic releases in recent days, today’s RBA policy statement may take on a tad more dovish tone than seen in previous correspondence. Market participants will be watching closely the ensuing statement for any downgrade from the previous statement and the recent policy meeting minutes which noted China was showing “tentative signs that growth was stabilising at a more sustainable pace.” Also on today’s docket is the second-quarter current account and net exports of GDP.