Market Drivers for October 28, 2015
Europe and Asia
AUD: AU CPI 0.5% vs. 0.7%
EUR: GFK Survey 9.4 vs. 9.5
North America
USD: Trade Balance 8:30
USD: FOMC Statement 14:00
Australian inflation readings came in much cooler than expected sending the Aussie plunging in early Asian trade as some market participants began to price in the possibility of an RBA rate cut at the upcoming meeting next week.
The Australian CPI figures missed on all fronts coming in weaker than forecast on headline, trimmed mean and weighted average basis. The headline numbers printed at 0.5% versus 0.7% eyed, the trimmed mean was only 0.3% versus 0.5% and the weighted median numbers were similar.
Since AU CPI data is only reported on a quarterly basis, the markets take the release very seriously and the surprising weakness in price levels immediately sent the Aussie lower by half a penny, but the unit found support ahead of the .7100 figure. The debate amongst analysts now is whether this data point will force the RBA to consider easing next week, or whether the policy makers in Sydney will decide to hold off at least until December before making any moves.
The opinion is split, with ANZ analysts suggesting that the past six months' annualized rate of inflation is now only 1.7% - well below the RBA's target of 2-2.5%. However, Westpac strategists noted that the RBA will not move on rates until there is a marked deterioration in economic data and that they will look through the disinflationary trend for now.
We tend to agree with the latter point of view if for no other reason than it would be awkward for the RBA to lower rates just as banks in Australia are actually raising their mortgage rates in response to still strong housing demand. We believe that the RBA will want to see the employment data due out in the middle of next month before committing to any further easing action. Last month's data disappointed the market, showing a decline in the headline number. If November's report also shows a contraction in jobs, the RBA would be more motivated to act in December.
The low CPI readings however point to a larger issue across the whole G-20 universe—namely that inflation pressures have been completely missing, driven lower in part by declining energy costs and partly by lackluster consumer demand. Given these conditions, it's difficult to imagine that the FOMC meeting later today would issue a hawkish press release.
No one anticipates any change in policy but the market will carefully scrutinize the tone of the communique from the Fed. With growth subdued and inflation tepid the Fed should maintain present policy. However, US authorities have come under increasing attack for being too cautious in normalizing monetary policy and may feel compelled to move by December irrespective of the underlying fundamentals.
If they do hint that a shift is coming, the greenback would get a late afternoon boost, with EUR/USD likely dropping through the 1.1000 figure while USD/JPY could challenge the 121.00 level once again.