Despite neutral to weaker risk trends across key sentiment barometers overnight, the Aussie, Kiwi and sterling led a charge higher against the greenback, leaving the Euro and CAD trailing behind. Yesterday’s domestic inflation dataprovided a key inflection point for the Aussie dollar and the subsequent Chinese PMI release confirmed the trend. According to the Australian Bureau of Statistics, headline inflation grew at a yearly pace of 2-percent in the third-quarter. The RBA’s preferred core price measure (the trimmed mean and weighted median) rose in excess of expectations, up 2.4 and 2.6 percent respectively. While the RBA’s inflation target range of 2 – 3 percent is not in breach, market participants have scaled back near certain odds of a Melbourne Cup day interest rate cut.
Solid bids for the Aussie were also noted in the ensuing period of yesterday’s Chinese PMI. According to HSBC, manufacturing PMI rose to 49.1 in October from a previous 47.9. Although the index is still in contraction territory, it represents another tentative sign China’s economy is beginning to stabilize. While the RBA may categorise inflation pressures as transitory given the introduction of the carbon tax, it’s also apparent they now have less “scope” than previously thought. They may also acknowledge tentative signs China is stabilizing, in light of the strong data pulse from the region.
Meanwhile, less-than-encouraging Euro-Zone PMI releases kept the Euro under moderate pressure. Both German services and manufacturing PMI fell short of estimates, and Euro-Zone Composite fell deeper into contraction territory. Spain’s economic fortunes also continue to hang in the balance. According to central bank estimates, growth contracted by 0.4 percent in third-quarter from the previous quarter. Investors also appear to be growing impatient with Madrid’s apparent reluctance to request financial aid, considered a critical part of the equation needed to restore confidence in the broader Euro-Zone.
Across the Atlantic, US markets managed to regain some composure after Tuesday’s sell-off with benchmark indices finish the day slightly lower after modest gains earlier in the session. Tuesday saw stock markets recalibrate earnings expectations after a slew of less than encouraging reports, in turn providing greater scope for upside surprises. Markit manufacturing PMI rose to 51.3 in October from a previous 51.1. Economists had anticipated a slight larger rise to 51.5.
This morning the Australian dollar briefly broke short-term resistance of 103.5 US cents and residual support from the Kiwi(after the RBNZ policy decision) has kept the momentum in its favour despite late weakness from US equities. Although we anticipate 104 US cents is the next technical pit-stop for the local unit, it unlikely to find the impetus to do so in the domestic session. This leaves the Aussieat the mercy of offshore moves to confirm or deny the trend with the next major directives will be the FOMC policy decision, durable goods orders, weekly jobless claims and housing data. At the time of writing the Australian dollar is buying 103.5 US cents.