GO Markets FX Commentary - RBA Preview

The Aussie dollar has continued to come under pressure overnight coinciding with a steep drop from U.S equities with the S&P500 and DOW shedding 2.85 percent and 2.36 percent respectively. The economic plight of Greece remains the key market moving theme, as market participants continue to ponder the economic future of a nation seemingly on the verge of collapse. Compounding this negativity has been the confirmation Greece will fall short of deficit reduction targets. European finance ministers began a two-day meeting Monday with Greece no doubt the primary topic of conversation and their eligibility to receive their next bailout installment to the tune of 8 billion-Euros.

The U.S dollar remained a currency of least resistance with solid gains against risk currencies, in turn promoting weakness across commodity, metal and energy markets. The Euro fell to fresh 10-yr lows against the Yen, and continued its downward trajectory against the greenback to hit 10-month lows of 1.3163.

A bright spot in the session came as the ISM manufacturing gauge rose above estimates to record an index level of 51.6 in September against an expected fall to 50.5. We also saw better-than-expected construction spending and ISM price paid data. Nevertheless, it failed to establish a solid foundation across markets which are transfixed on the events of Europe, with the spotlight firmly on Greece.

The Aussie dollar has broken through longer-term support of 95.3 US cents and a convincing break through the 95 US cent region is likely to see the local unit take another leg down with further losses likely to be contained around the 93.8 US cents in the short-term, albeit there are weaker pockets of support on the way down. Nevertheless, it’s a big day for the local unit with the RBA rates decision due to be released at 1430 AEST.

Although we expect the meeting will see the RBA maintain interest rates at 4.75 percent, it’s the finer points of the ensuing statement that will no doubt be the market mover. Clearly a dovish turn by Stevens and Co will promote further losses on the local unit; however a continuance of the tone of neutrality may provide relative stability for the Aussie dollar in a market all too willing to concentrate on the negatives. Although the global economic environment is hardly inspiring, there are some positives to be a drawn from a local perspective. Importantly, China’s thirst for Australia’s resources remains robust and we expect the statement today to serve as a reminder that the underlying fundamentals – for the most part – remain strong.

In an interview with Dow Jones last week, Australia’s resources and energy minister Martin Ferguson maintained an overall bullish outlook for the local economy suggesting the major challenge from a local perspective is meeting capacity constraints in the mining sector with some $430 billion worth of projects in the pipeline, in-turn creating a need to combat wage pressures. It’s this view that may provide a reason for the RBA to remain composed at a time when market uncertainty is high. A key focus will be feedback on how the RBA will view recent changes to the methodology in calculating consumer prices which saw a downward revision of underlying inflation in the second quarter.

In short, there may be a case for the RBA to take a dovish turn, however we expect the ensuing statement to be supportive for the Aussie dollar in the local session with overall trajectory at the mercy of global risk trends. At the time of writing the Aussie dollar is buying 95.15 US cents.