The health of corporate America remained a primary barometer of sentiment overnight, with earnings from Caterpillar - although better than estimated - painting a rather mediocre outlook for future earnings. This appears to be the common theme across U.S corporates, in turn markets continue to focus on growth risks. Across currencies, the Japanese Yen maintained its south-bound trajectory with speculation of imminent monetary easing from the Bank of Japan the primary catalyst. After falling over 1-percent against the greenback last week, the USDJPY pair continued to find higher ground with price action now at a fresh 15-week high. Still, the Yen's new found weakness may only be short-term should the Bank of Japan disappoint at the October 30 meeting. The USDJPY pair has now enjoyed eight consecutive sessions of gains, aided last week by a stronger US data pulse and BoJ easing expectations. Even a decidedly risk-off session failed to see a safety-fuelled switch to the JPY late last week. Merger and acquisition activity has also kept the balance in favour of the greenback with Japanese Telecommunications company Softbank announcing their intention to purchase a $US20.1 billion slice of US company Sprint Nextel Corp. While the prospect of real capital flows may underpin dollar strength / yen weakness, it's clear this alone will not create the key inflection point needed to encourage a sustained Yen reversal. Key to the pair's fortunes will remain speculation over further Bank of Japan monetary easing.
Meanwhile, the Euro evaded another potential stumbling block overnight after Spain's Peoples Party - led by Mariano Rajoy - secured a win in the region of Galicia. Markets are clearly focusing on the prospect of a Spanish bailout, and any easing in political tension provides further scope for Rajoy's ruling party. Still, hopes of a Spanish bailout may wear as Rajoy maintains a casual demeanor in spite of growing investor expectations. "I'm not going to take into account any pressure that people might exert on me, but frankly no one is doing that," I don't see any European Union leader telling me I should use the mechanism the ECB has put in place." Rajoy noted last week. Nevertheless, there's been little in the way of catalysts to prompt a recalibration of expectations, thus providing an element of support for the Euro which remained supported above $US1.30 overnight.
The Australian dollar was softer across the board, but stayed within range against the greenback with 103 US cents providing support. The federal government's mid-year economic and fiscal outlook has also provided moderate headwinds for the local unit. Treasurer Wayne Swan yesterday unveiled a series of budget cuts in an effort to return the budget to surplus. It's apparent any fiscal restraint will spill across to monetary policy, suggesting the RBA may have additional scope to maintain accommodative policy, in turn strengthening the case for a Melbourne cup day interest rate cut.
From here markets will be waiting in anticipation for tomorrows inflation data. The central banks preferred measure of inflation (the trimmed mean and median) which excludes the most volatile prices on the scale, are both expected to record 0.6 percent growth on quarter, or 2.2 percent annually. Headline inflation is expected to record growth of 1-percent from 0.5 percent in the second-quarter, representing annual growth of 1.6 percent. The bank has made clear the local inflation outlook provides "scope" for further monetary accommodation and markets have suitably priced in the chances of a November rate cut. While an on-target or weaker print may serve as a reminder of the RBA's "scope" to respond to struggling sectors of the local economy, any deviation to the upside of forecasts will force a paring back of policy easing expectations, in turn a key directive for the Australian dollar. At the time of writing the Australian dollar is buying 103.20 US cents.
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