AUD stronger post RBA meeting, important day for GBP

Summary:

• Reserve Bank of Australia kept its interest rates on hold

• Brussels could offer a proposal on Ireland to resolve the last huge big sticking point in the ongoing negotiations

• Weak data from Japan, Asian stocks mixed, USD and Treasuries steady ahead of elections

Asian equity markets are trading mostly higher on Tuesday following a good session on Wall Street where both the SP500 (US500) and the Dow Jones (US30) closed the first trading day this week higher - 0.6% and 0.8% respectively. On the other hand, the NASDAQ (US100) lost 0.4% and some of equity experts claimed that its underperformance stemmed from the fact that investors worried about the midterm elections and therefore decided to dump technology, communications services and consumer discretionary stocks. In Asia, the Japanese NIKKEI (JAP225) gained 1.1% while stocks in China are trading 0.7% lower at those trading in Hong Kong are trading flat at the time of writing. A decent gain was seen in Australia where the benchmark S&P/ASX200 (AUS200) added virtually 1%. Writing about Australia it is worth focusing on the central bank even as it left all monetary policy settings unchanged at today’s meeting.

The policy rate in Australia is still 1.5% and based on market expectations one may be quite sure that rates will not change there for days. The probability of such a move exceeding 50% is not seen until November 2019. Looking at the RBA’s statement one may arrive at a conclusion that not too much has changed since the last meeting in October. The bank still sees low rates as supportive of the economy. It predicts a gradual improvement in terms of unemployment and inflation seeing GDP growth a bit higher in 2018 and 2019 compared to the most recent forecasts and inflation reaching 2.25% in the following year and then slowing in 2020. The central bank also admitted that housing markets in Sydney and Melbourne had slowed down while credit conditions were tighter than they had been for some time. When it comes the the exchange rate the monetary policy authority said that it remained in a range similar to past couple of years. Analysing the statement one may notice that the RBA does not seem to be particularly concerned about the slowing Chinese economy and risks posing to the Australian economy. On top of that, falling house prices could be soon reflected in consumer spending via a negative wealth effect. Therefore, it can be probable that the RBA is too optimistic about the growth outlook underestimating some risks both external and internal. As for now the Reserve Bank of Australia appears to be comfortable having stable rates. Note that the monetary policy report for the fourth quarter will be released on Friday.

The AUDUSD tried to move through the upper limit of the bearish channel and even as the attempt did not end with a big breakout bulls have not backed down since then. As a result the pair is currently trading above this mark and assuming the continued upward move (the US dollar could be under pressure due to elections results) one may expect the pair to rise toward 0.75. Source: xStation5

Tuesday was to be a big day for the British pound but it looks that it will not be as Theresa May will probably not ask ministers to approve the terms of a Brexit deal during a meeting today, according to Bloomberg. On the other hand, The Times reported that Brussels will offer a compromise proposal regarding Ireland in order to resolve this sticking point. Senior European Union figures are to offer Theresa May an “independent mechanism” by which the Great Britain could end a temporary customs arrangement with the bloc, according to the article. The pound is trading slightly higher this morning in anticipation of the UK Cabinet discussion on Brexit.

The GBPUSD has gained substantially of late and it could be en route to 1.3340. However, any incoming Brexit developments could play a big role in GBP performance hence increased volatility might be observed in the upcoming hours and days. Source: xStation5

In the other news:

• Japanese consumer spending fell 1.6% YoY in September missing the median estimate of a 1.5% YoY increase, the yen trades 0.2% lower against the dollar this morning

• US dollar index trades virtually flat along with the 10Y Treasury yield (3.2%) ahead of the midterm elections today

• German factory orders declined 2.2% YoY in September beating the consensus of a 2.8% YoY decrease