Unenthusiastic RBA Leaves AUD Adrift in Sea of Red

AUD

The AUD was absolutely battered yesterday, losing out against all the majors with an unenthusiastic RBA failing to impress markets despite dropping its yield targets, and to make things worse, Iron Ore fell off a cliff which also hurt AUD demand. As was widely expected, the RBA left the cash rate on hold for the 12th month in a row, but it did abandoned its "yield curve control" which involved the RBA buying billions of dollars in Australian government three-year bonds, which mature in April 2024, to artificially drive their yield (or return) down to 0.1 per cent. The RBA stated that “the decision to discontinue the yield target reflects the improvement in the economy and the earlier-than-expected progress towards the inflation target”. That's where the positivity ended. There was plenty in the RBA's statement with an overall dovish tone from Governor Lowe who stated that markets had completely overreacted to last week's Q3 inflation data and he dismissed speculation that the central bank would be forced to hike rates as early as next year. The AUD was immediately down after the release and continued to trail away as other factors also started to pile on the AUD. A sharp decline in Chinese Iron Ore prices saw Benchmark Futures in China dive to its daily trading limit on Tuesday and fell below 600 yuan per tonne for the first time in nearly a year due to looser supply conditions and poor demand outlook. Only a short time from a breather from what was a busy Tuesday, tonight it's the US Fed's turn to deliver its monetary policy update.

USD

The AUDUSD lost close to a whole cent since yesterday morning, trading at 0.7431 this morning. US equities were stronger ahead of tomorrow morning's FOMC meeting with the Dow Jones and the S&P 500 both +0.4%, while the NASDAQ finished +0.3% higher. The Federal Reserve is expected to approve plans to scale back its $120 billion monthly bond-buying program put in place to help the economy survive the coronavirus pandemic, while markets will also be focused on commentary about interest rates and how sustained the recent surge in inflation is. Jerome Powell will have to walk on eggshells to prevent an acceleration of the front-end of the USD yield curve, though arguments for the Fed to tighten policy keep piling up and hence it is likely that they could announce a swift tapering process. Although the FOMC will the be the main event, the US will also release ADP Non-Farm Jobs data, and some Services PMIs which will also garner attention.

EUR

The AUDEUR also plummeted south, losing its short-lived handle above 0.65 as it trades at 0.6415 this morning. European equities traded either side of flat over the morning with the FTSE underperforming at -0.5%, the DAX gaining +0.5%, and the CAC up 0.9%. Yesterday evening saw the release of a handful of European Manufacturing PMI numbers for October. Spain kicked things off at 57.4 (58.1 expected) with Italy at 61.1 (59.6 expected). France printed at 53.6 (53.5 flash), Germany at 57.8 (58.2 flash) with the Eurozone coming in at 58.3 vs the preliminary reading of 58.5. Markets were largely unaffected by the data with the Aussie monetary policy statement taking centre stage. Tonight will see Spanish Jobs data as well as more insight from ECB President Lagarde.

GBP

The AUDGBP following suit lower, losing the 0.55 handle and sitting at 0.5456 this morning. It’s been a quiet start to the week for the Brits, largely sitting on the sidelines to be entertained by other central banks. That will change when the BOE meets at its monthly policy meeting tomorrow night. Inflation risks have surged, but there are growing doubts around what the central bank will actually do. Three of the nine Monetary Policy Committee members, including the BoE Governor Andrew Bailey, have been voicing concerns around inflation and the need to act. It is a close call whether the Bank of England (BoE) hikes on Thursday or not, so should there be a hike, it could well be a dovish one with the BoE saying that the hiking cycle will be "gradual and limited".

NZD

The AUDNZD not one to miss out, with the pair capping off the dismal run for the AUD, trading at 1.0419 last night. The AUD pain was exacerbated by stronger than expected Unemployment Data out of NZ, with the Unemployment rate decreasing from 4.0% to 3.4%, better than expectations of 3.9%. This is the lowest level since the start of the Global Financial Crisis in 2008 and signals that the NZ economy is well-placed to recover despite uncertainty in markets. RBNZ Governor Adrian Orr gave his opinion on the recently released strong Q3 jobs report while speaking on the bi-annual Financial Stability Review. Orr mentioned "GDP figures becoming increasingly difficult to understand given COVID-19 volatility." The RBNZ leader also cited supply of space and land as the main drivers of house price volatility.