After being the recipient of solid support in recent sessions, the Euro retraced recent gains overnight with a break below $US1.30 before finding support around $US1.2550. Spanish debt concerns began to infiltrate investor psyche once again after the central bank’s growth revisions and ratings agency Moody’s downgraded five Spanish regions, including that of Catalonia ahead of a November 25 election to vote of separating from Spain. An earlier debt auction which was mixed but the prospect of a bailout continued to cushion demand.
Both the Australian and New Zealand dollars fell in unison with US dollar strength noted across major counterparts. Support around 102.9/95 failed to hold with sell-stops below encouraging a deeper correction for the Aussie. The health of US corporates remained a key point of contention for US markets with industry heavyweights such as Xerox, DuPont and UPS failing to meet revenue estimates. The DOW and S&P500 slumped 1.82 and 1.44 percent respectively.
The Canadian dollar was an exception to the rule, managing to ward off weakness seen across the commodity currencies. Recent sessions have seen the Canadian dollar hit by what appeared to be a dovish turn by Bank of Canada Governor Mark Carney. Last week Carney noted: “Elevated global uncertainty is holding back global economic growth and, thus, the demand for Canadian exports. In addition, there is some evidence that global uncertainty is affecting domestic activity.” But Carney maintained the tightening bias overnight; with the policy decision statement showing “modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2% inflation target.” The statement added, “The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.”
Local pundits will now be watching closely at today’s domestic inflation data, with the HSBC China manufacturing PMI also likely to be a key barometer for the Australian dollar. The RBA’s preferred measure of consumer prices (the trimmed mean and median) which excludes the most volatile prices on the scale, are both expected to record 0.6 percent growth on quarter, or 2.2 percent annually. Headline inflation is expected to record growth of 1-percent from 0.5 percent in the second-quarter, representing annual growth of 1.6 percent. The bank has made clear the local inflation outlook provides “scope” for further monetary accommodation and markets have suitably priced in the chances of a November rate cut. Nevertheless subdued inflation will serve as a reminder of the RBA’s “scope” to respond to struggling sectors of the local economy. The HSBC Flash China manufacturing data scheduled for release at 1245 AEST will also be closely watched and a considerable barometer for the Australian dollar. Any deviation from the downside of estimates will once again place the local unit in a vulnerable position, with support at 102 and 101.5 US cents likely to help contain losses before the European handover. Nevertheless, the upside potential is also present given markets have – for the most part – baked a rate cut on Melbourne Cup day. Should both inflation and Chinese data outpace expectations, we anticipate buyers to return to the market with a break above 103 US cents expected.