Talking Points:

Australian Dollar Gains as RBA Signals Interest Rate Cut Unlikely Ahead
Yen Corrects Upward After Sliding to a 6-Year Low vs. Top Counterparts
Pound at Risk of Outsized Losses if Construction PMI Figure Disappoints

The Australian Dollar advanced in overnight trade, rising as much as 0.4 percent on average against its leading counterparts. The move followed the RBA monetary policy announcement where policymakers struck a neutral tone once again after keeping the benchmark lending rate unchanged at 2.5 percent. Governor Glenn Stevens said “inflation is expected to be consistent with the 2–3 percent target over the next two years,” seemingly putting policy on standstill in the interim. That seemed to amount to a supportive catalyst for the Aussie considering the build in priced-in rate cut probability since October’s sit-down.

The Japanese Yen likewise moved higher, adding as much as 0.5 percent against the majors. The move appeared broadly corrective after the currency’s average value against leading alternatives plunged to a six-year low yesterday. The move mirrored a pullback in the Nikkei 225 stock index, which pulled back to close a dramatic opening gap that took Japan’s equities benchmark to heights unseen since October 2007 as markets continued to digest last week’s surprise stimulus expansion from the BOJ.

A relatively quiet economic calendar in European trading hours is headlined by October’s UK Construction PMI report. Sector growth is expected to slow after hitting an eight-month high in September. Yesterday’s upbeat Manufacturing PMI print notwithstanding, UK news-flow has broadly deteriorated relative to consensus forecasts over the past seven weeks, opening the door for a downside surprise. The British Pound was conspicuously unable to muster upside follow-through on yesterday’s upbeat factory-sector PMI print, which hints at underlying weakness. That warns that a soft result today may prove particularly punishing if it materializes.

Looking further ahead, the spotlight will turn to September’s US Factory Orders report, where a second consecutive month of losses is expected (albeit on a far smaller scale than August). As we argued in our weekly forecast however, the US Dollar probably won’t find a lasting negative catalyst in a soft result as the Federal Reserve conspicuously looks past near-term business cycle fluctuations to maintain a steady march toward policy normalization. Indeed, Dallas Fed President Richard Fisher said yesterday the latest FOMC statement “neutered” the pledge to keep interest rates low for an extended period and warned that waiting until late summer 2015 for a hike would be too long.

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