Post-Fed Optimism Takes a Breather; Europe’s Debt Crisis Back on the Radar

After last week's Fed-induced rally, we've seen little in the way of follow-through this week with market participants seemingly consolidating in anticipation of new directives from the Euro region. In recent weeks we've seen the Euro propped up by the prospect of ECB intervention, and while this may remain a critical pillar of support, reluctance from Spain to formally request a bailout appears to dampening enthusiasm. Despite a slightly better than anticipated German ZEW release, the Euro continued to grind lower overnight with a break to the downside of $US1.31 before bottoming out at $US1.3028.

The Australian dollar has remained under moderate pressure overnight amid a lack of positive directives to keep the upside momentum alive. The ensuing period of yesterday's RBA minutes release was moderately supportive of the local unit for a short period before grinding lower in the latter part of the domestic trade. The minutes demonstrated the board has the breathing space to further support the economy noting "the current assessment of the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth." The minutes also acknowledged the implications of the high Aussie dollar, noting the high exchange rate was "weighing more heavily on the economy than might be expected." In short, there is a valid case to suggest the RBA's next move could indeed be to cut rates; nevertheless it is also clear the board are reactive to the incoming data pulse which may not cement the case for further monetary easing in time for a November rate cut.  Both macro and anecdotal evidence continues to point to diminishing growth prospects in China, amid a reluctance from monetary authorities to embark of further easing initiatives given the risk of reigniting inflation. There's also a sense the Peoples Bank of China may hold off on new stimulus measures in response to the Fed's latest quantitative easing venture. It's clear the Aussie dollar as a proxy to China continues to reflect this negativity.

The day ahead will see the focus turn to the Bank of Japan policy decision which is expected to see benchmark rates remain on hold. The key focus of the meeting will be if the bank decides to follow the lead set by Europe and the U.S and pursue further monetary stimulus, while downgrading growth prospects given sub-par export growth in the region. Locally we have the Westpac leading index on the docket at 10.30 AEST.