Rates Outlook: AUD at the Mercy of Global Risk Trends

The domestic week ahead will see the focus turn to data on new home sales and building approvals early in the week with private sector credit, AIG manufacturing and export/import price indices on Thursday. Third-quarter producer price index data will wrap up a fairly light week for economic data on Friday. Local pundits will also be watching a speech by RBA Deputy Governor Philip Lowe on Tuesday for further clues ahead of the RBA policy decision next week.

After starting the week on the back foot, the Australian dollar managed to squeeze out a 0.41 percent gain over the week. The chances of the RBA cutting the overnight cash rate at their November 6 meeting have narrowed over the course of the week. As of Friday futures pricing implied a 60 percent chance of a 25bps cut, down from near 90 percent earlier in the week, driven by a stronger than expected inflation pulse which has reduced expectations of a Melbourne Cup day interest rate cut. According to the Australian Bureau of Statistics, headline inflation grew at a yearly pace of 2-percent in the third-quarter. The RBA's preferred core price measure (the trimmed mean and weighted median) rose in excess of expectations, up 2.4 and 2.6 percent respectively.

Solid bids for the Aussie were also noted last week in the ensuing period of yesterday's Chinese PMI. According to HSBC, manufacturing PMI rose to 49.1 in October from a previous 47.9. Although the index is still in contraction territory, it represents another tentative sign China's economy is beginning to stabilise. While the RBA may categorise inflation pressures as transitory given the introduction of the carbon tax, it's also apparent they now have less "scope" than previously thought. They may also acknowledge tentative signs China is stabilizing, in light of the strong data pulse from the region. There is, however, a strong case to suggest the RBA may decide conditions both locally and abroad warrant further monetary easing, the most trivial of which is a Melbourne Cup day change - either higher or lower - appears to of been the tradition in recent years. A persistently high exchange rate may provide further evidence needed for the bank to cut rates, and a recent step-up in rhetoric from board members suggests the high Australian dollar is more than ever on the banks radar. Nevertheless, Stevens and Co are acutely aware of the limitations a small tweak in the cash rate has on the exchange rate, suggesting a rate cut won't be a direct attempt to influence the Australian dollar.

From a technical perspective, offers around 104 US cents will continue to provide resistance. A lack of top-tier local releases may place the emphasis on risk trends abroad, with a clear inflection required to make a convincing break to the upside of 104-figure. Thursday's official Chinese manufacturing PMI may mean the difference between a sustained break of 104 US cents or a steeper descent to the downside of 103 US cents. Conjecture surrounding the health of China appears to have been touch more positive in recent weeks with solid trade data and a stronger flash manufacturing PMI last week providing support for China-contingent currencies such as the Aussie dollar.

Meanwhile, the final leg of the US Presidential Election will begin to play a greater role before voters go to the polls on November 6. While polls predict either Presidential candidates Romney and Obama could squeeze out a victory by a miniscule margin, Obama remains odds on favorite to win a second term. Although political uncertainty is not conducive to market strength; a series of top-tier economic data points this week will continue to provide direction to broader market sentiment, in turn the US dollar. Friday's non-farm payroll data may be the best barometer of Obama's reelection hopes, and any signs of improving labour conditions may provide the final surge of momentum needed for an Obama victory. In the past it's been general thought republican policy is conducive to greenback strength, however any correlative value is far from decisive and basic analysis on the US dollar index in election periods provides inconclusive results. We can only assume the US dollar will remain at the mercy of a mix of election conjecture, corporate earnings and key fundamental economic feedback. Although the health of corporate America will remain a primary market focus it may receive less attention than in previous weeks given the focus on the Presidential Election. Key macro releases to watch out for will be data on personal consumption expenditure, consumer Confidence, ISM manufacturing and factory orders. Non-farm payrolls on Friday will headline a week full of event risk with a number of pre-cursors such as ADP employment change, challenger job cuts and weekly jobless claims will no doubt be a key barometer leading up to Friday's release.