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IronFX Daily Commentary | RBA leaves rates unchanged | 01/12/2015

The Big Picture

01.12.2015, 10am

• RBA leaves rates unchanged The Reserve Bank of Australia kept its key interest rates unchanged as was widely expected, amid signs of improvement of business conditions over the past year and a stronger growth in employment. It signaled however that low inflation may afford scope for further easing of policy. The statement accompanying the decision was virtually unchanged from the previous one, with the tone staying neutral to slightly positive. Nevertheless, the recent strength in the AUD on a trade-weighted basis, despite the falling iron ore prices, could encourage the RBA Governor Glenn Stevens to resume talking down the currency. In today’s statement, Bank officials reiterated their stance that the Australian dollar is adjusting to the significant declines in key commodity prices. However, with the iron ore prices (Australia’s main export) hitting new lows while the AUD being relatively stable, this relationship show signs of divergence. As a result, if the AUD continues to strengthen and iron ore prices continue to fall, the RBA officials could reintroduce talks to weaken their currency in their next meetings. Governor Stevens did said that the markets should “chill out” on prospects of another rate cut, and the markets did so with no major reaction from AUD at this event. We remain cautious on further appreciation of AUD against the dollar and we would prefer to exploit Aussie’s strength against its New Zealand counterpart.

• The International Monetary Fund agreed on Monday to add the Chinese yuan to its reserve currency basket. The inclusion –effective next October-- represents recognition that the yuan’s status is rising along with China’s place in global markets. This is however, in large part symbolic. Whether the yuan will be used by central banks as reserve currency will highly depend on China’s success in deepening its financial system, promote financial reforms, and the currency being more “freely tradable”.

• Today’s highlights: During the European day, we get the final manufacturing PMIs for November from several European countries and the Eurozone as a whole. As usual the final forecasts for the PMIs are the same as the initial estimates, thus the market reaction on these news is usually limited, unless we have a huge revision from the preliminary figures. From Germany, in addition to the final manufacturing PMI, the unemployment rate for November is expected to have remained unchanged at a record low level of 6.4%. Eurozone’s unemployment rate for October is also to be released.

• From the UK, we get the manufacturing PMI for November, which is expected to have decreased moderately. This could prove GBP-negative.

• In the US, the ISM manufacturing PMI and the final Markit manufacturing PMI, both for November are also due out. The market pays more attention to the ISM index, which following its third consecutive decline in October and reaching its lowest level since 2013, is expected to have increased in November. This could support the greenback somewhat.

• From Canada we get the quarterly GDP data for Q3 and the monthly GDP figure for September. The market expects the annualized quarterly rate to expand at a 2.3% qoq pace after contracting 0.5% qoq in Q2, escaping from technical recession. While the monthly rate is forecast to decline to 0%. The weak monthly print in August and a possible weak print in September however, along with the low commodity prices raise questions on how the Q3 figure as a whole could improve. As a result, we could see a disappointment at today’s release, which could put the loonie under renewed selling pressure. We also get the RBC manufacturing PMI for November but no forecast is available.

• We have three speakers on Tuesday’s agenda: BoE Governor Mark Carney and Chicago Fed President Charles Evans speak.

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