RBA to hike rates, AUD favoured against the EUR

EUR looks generally expensive

Scope for a USD recovery on Fed speeches

The RBA rate decision is the first item on Tuesday’s calendar. The market is pricing in around a 60% chance of a 25bp rate hike, while 90% of forecasters are looking for a 25bp hike.  And indeed the RBA hiked the cash rate to 4.35% as most market participants anticipated. The key statement of "Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks." has changed to "Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks." This weak language seems to suggest the RBA is tilting towards not hiking anymore but will let data guide their action as they are not sure where inflation may go in a short run. The rhetoric is similar to what the RBA has been stating for the past month and they have acted accordingly with a hike in the November meeting in sight of higher Q3 CPI.

EUR/AUD looks like the best play for AUD bulls. The correlation with yield spreads has historically been strong, but the AUD has underperformed in recent weeks. Both the EUR and the AUD tend to benefit from a risk positive market, but the AUD has a better fundamental case for gains given the stronger growth seen both now and in the period since the start of the pandemic, and should also have benefitted from the terms of trade moving in the AUD’s favour in recent years. That the AUD has underperformed in the last month looks to be a function of concern about Chinese growth and weak regional equity performance, but the Australian economy is still likely to outperform the Eurozone despite any weakness in China. 

Otherwise Tuesday’s calendar looks fairly quiet. German industrial production is expected to show a small decline in September, which wouldn’t change the underlying picture of stagnation. The orders numbers on Monday were stronger than expected, but are much more volatile than the production numbers and despite the modest rise in September, the underlying trend is still weak, albeit hard to pin down because of the sharp rise in orders in June. We continue to see the German data and the Eurozone data in general as providing support for a more dovish ECB stance, but the market is unlikely to change its view of the near term policy path without much more dovish commentary from the ECB. Even so, the EUR/USD move above 1.07 seems unlikely to extend, with the EUR looking generally expensive on the crosses relative to yield spreads. The CFTC data also suggests that the only speculative USD short position left in the market is against the EUR. So while a trigger for EUR weakness seems unlikely to emerge on Tuesday, we would favour short EUR positions on the crosses. 

While there is no particularly relevant US data on Tuesday, there are a couple of speeches due from the Fed’s Waller and Williams, which may indicate their take on the significance of last week’s employment report. To us, the sharp decline in US yields and the USD looked overdone, with the upward revision to the last couple of months’ earnings data offsetting the slightly lower than expected payroll gain. We wouldn’t expect these numbers to have significantly altered Fed thinking, and if today’s Fed speeches also suggest that, the USD may manage some recovery.