Markets Yearn for Dovish ECB, SNB After RBA Disappoints

Talking Points:

Commodity Dollars drop, Yen and Euro rise as RBA triggers risk aversion
Dovish commentary from ECB and SNB officials may help uplift sentiment
Upbeat UK PMI, hawkish Fed-speak threaten cut short any risk recovery

The Australian, Canadian and New Zealand Dollars underperformed while the anti-risk Euro and Japanese Yen traded higher as sentiment soured in overnight trade. Investors’ mood darkened after the RBA delivered a status-quo monetary policy statement, as expected. The neutral posture undermined hopes for a further expansion of global stimulus efforts following last week’s top-up from the BOJ.

The post-RBA response underscores sentiment’s ability to trump macroeconomic fundamentals in the current environment. While the Aussie Dollar initially rallied as rate cut chances ebbed, the move was swiftly dwarfed by risk-off momentum. Traders’ loud cheering for the BOJ’s very modest boost to policy support and stubborn commitment to a dovish Fed outlook are other symptoms of the same phenomenon.

Looking ahead, comments from ECB policymaker Benoit Coeure and SNB President Thomas Jordan will maintain the focus on monetary policy trends. Mr. Coeure’s remarks will be scrutinized for clues about a possible expansion of ECB QE next month. Those of Mr. Jordan may help inform bets on the Swiss monetary authority’s appetite for matching the efforts of its Eurozone counterpart as it struggles to ward off imported disinflation.

Sentiment may find a modicum of renewed support if the two officials’ comments buoy hopes for additional accommodation in the pipeline. The durability of a recovery in risk appetite may prove lacking however if UK Construction PMI figures follow yesterday’s manufacturing report to surprise on the upside, fueling fears that the BOE may yet raise rates this year. Comments from Kansas City Fed President Esther George may compound risk-off pressure if the vocally hawkish voter on this year’s FOMC talks up the case for further tightening.

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