FX Market Wait
European stocks and US futures are mixed following a soft Asian session. Wall Streets’ close was lower as September retail sales were weaker than expected. Slower sales across headline and core indicate consumption spending is decelerating in 4Q. The unexpected drop in retail sales increased market pricing for an October 25bp rate cut by the Fed. Treasuries yields ticked lower due to weaker risk sentiment. Doubt over a Brexit deal between the UK and EU has placed a gloom over markets. GBP fell sharply for 1.2877 high, as a deal fail to materialize, despite hype suggesting talks were close. Talks are now in the critical 24-hour period. Traders should expect high, scary levels of rogue GBP volatility.
The last update hitting the wire is that Boris Johnsons Northern Irish allies would not support this Brexit deal. While progress is being made in Brussels (or so we hear), the Democratic Unionist Party still has issues with three main points. First, arrangements for dealing with a customs check between UK-Irish borders, Northern Irish veto power for customs checks and how to institute sales tax will be levied. Data indicated that UK headline inflation was unchanged at 1.7% but the MPC’s preferred measure for underlying service inflation jumped to 2.4% from 2.0% in August. However, the reaction was muted at the focus is clearly on Brexit. FX markets are likely to collectively hold its breath until clarity on Brexit is reached. With a deadline looming large anything can happen. Was once said about The Clash’s debut album “London Calling”, right now it is the only thing that matters
RBA: labor data supports case for a December rate cut
Aussie traders should be delighted considering the recent downtick in September unemployment rate that allows the currency to rebound from weekly lows, although the consequences of the trade dispute and the continued slowdown in real estate construction should keep the gauge at current level by year-end, below the 4.50% optimum range set by the Reserve Bank of Australia. With inflation expected to close the year below the 2% – 3% target band, it seems that a sustained rebound in AUD is still limited as the RBA is expected to maintain its stimulus policy for the time being, with a 0.25 percentage point rate cut of its Cash Rate by December 2019.
The release of September unemployment rate at 5.20% (prior: 5.30%) had a positive impact on the Australian dollar, although a significant drag on residential construction, a sector that represents 2% of the total labor force and 6% of GDP, is expected to last until next year, which should weigh on the economy and employment data. As the RBA dovish Minutes confirm that the central bank is expected to ease further in order to support jobs and economic growth, the odds of seeing the RBA cutting its Cash Rate from historical low 0.75% to 0.50% in December, in line with the Fed’s easing cycle, is very likely. Implied volatility for a rate cut in November are now at 20% compared to 40% before the release of labor figures. Therefore, any sign of weakness of 3Q inflation published on 30 October 2019 should strengthen the case of further tightening by year-end.
AUD/USD is trading at 0.6817, trading at mid-September 2019 range after breaking key resistance at 0.6801 (24/09/2019 high), approaching 0.6860.
