Risk Trends Propel Greenback Higher

The Euro begun a new phase of weakness overnight with a break below $US1.30 before finding support around $US1.2550. Earlier support for the Euro faded after Spanish debt concerns began to infiltrate investor psyche once again. Ratings agency Moody's downgraded five Spanish regions, including that of Catalonia, which itself is a sore point for investors ahead of a November 25 election to vote of separating from Spain. An earlier debt auction which was met with mixed results, but still the prospect of a bailout continued to underpin demand.

Both the Aussie and Kiwi dollars fell in unison with broad-based greenback strength noted across the board. After testing support just below 103 US cent, sell-stops looming below encouraged a deeper southbound correction for the Australian dollar, coinciding with equity markets losses from both sides of the Atlantic. The health of corporate American remained a key point of contention for US markets, with another round of less-than-inspiring third-quarter earnings.

The exception was the Canadian dollar which managed to evade the correction seen across the commodity bloc. Recent sessions have seen the CAD marred by what appeared to be a dovish turn by Bank of Canada Governor Mark Carney after he noted: "Elevated global uncertainty is holding back global economic growth and, thus, the demand for Canadian exports. In addition, there is some evidence that global uncertainty is affecting domestic activity." But Carney maintained the tightening bias overnight; with the policy decision statement showing "modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2% inflation target." The statement added, "The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector."

The day ahead is a particularly important one for the Australian dollar, with domestic inflation and Chinese manufacturing data on the docket. The RBA's 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. Nevertheless subdued inflation will serve as a reminder of the RBA's "scope" to respond to struggling sectors of the local economy. The HSBC Flash China manufacturing data scheduled for release at 1245 AEST will also be closely watched and a considerable market-mover for the Aussie. If selling accelerates, we anticipate a test of tentative support at 102-figure, but ultimately less-than-inspiring Chinese numbers may encourage a deeper correction with 101.5 US cents the next logical point of support. At the time of writing the Australian dollar is buying 102.55 US cents.