After a series of attempts to flush out offers above 104 US cents last week, the Aussie dollar succumbed to largely negative risk trends on Friday, closing the week an overall 0.35 percent in the red. On balance, better-than-expected data both locally and abroad has kept the local buoyant in recent weeks, with a series of positive data points from China remaining a primary catalyst. Last week's rebound in China's official manufacturing PMI was the latest in a growing list of feedback from the region suggesting the period of sub-par growth has turned the corner. Over the weekend we also saw official services PMI index rise to 55.5 in October from a previous 53.7, once again adding credence to the view China's economy is stabilising after a comparatively soft first half of 2012.
Nevertheless, a new week brings new challenges with a host of local and offshore directives to guide the way. While the U.S presidential election and a range of top-tier event risk from both sides of the Atlantic will continue to govern risk trends, the local week ahead will see the spotlight on the local interest rates, with finely balanced expectations the RBA will slice another 25bps off the official cash rate. As of Friday, futures pricing implied around a 55-60 percent chance of a 25bps cut, down from near 90 percent change the week before. Nevertheless, if financial bookies are any guide, the case for the RBA to sit on their hands has gained momentum, with a 'hold' decision at this week's Melbourne Cup meeting now odds on favourite. There of course remains a valid case to suggest the a rate cut is on the agenda, the most trivial of which is Stevens has displayed previous form, either raising or cutting rates at every Melbourne Cup day decision in his six year tenure. While its apparent the RBA have well and truly left the door ajar for another rate cut, the recent stronger than anticipated local inflation pulse and stronger growth indicators from China, makes the case for the board to hold rates steady on Tuesday more compelling. Perhaps we can glean an indication from a speech last week from Deputy RBA Governor Philip Lowe who painted a fairly positive picture of local conditions, noting "Australia has had the highest level of investment, relative to GDP, in over a century, and a further increase is expected." Dr Lowe acknowledged tentative signs that growth in China has stabilised in light of the recent pick-up in growth indicators, while noting central bank and government decisions in the Euro region have "lessened the probability of a very adverse outcome." While it's hardly the smoking gun to suggest the bank will hold a steady course, we may consider this a gentle upgrade from recent - more dovish - feedback from the bank.
Once again, the high Australian dollar is likely to rate a mention given the exchange rate remains at elevated levels since the board last met in October. Recent comment from RBA board members Jillian Broadbent and Heather Ridout have flagged the implications of a high exchange rate. In a recent interview with the Wall Street Journal, Broadbent highlighted the need for a weaker currency as the mining boom comes off the boil, noting "I would hope the Australian dollar gets a bit weaker going forward as the mining boom eases off," And then we might get a bit more of a boost from having the currency a bit lower, rather than the dampening effect of being higher." At the very least, this suggests the high currency remains at the forefront of the RBA's mind. Although it may add weight to a near-term rate cut, it hardly suggests the bank will embark on a series of cuts specifically targeting the high exchange rate. The board are also acutely aware of the limitations policy easing may have in effecting the exchange rate, given the board range of directives underpinning its strength as noted by Deputy Governor Lowe in last week's address.
In the frame this morning will be a private gauge of inflation by TD securities, retail sales and trade data, all of which timely releases ahead of tomorrows policy meeting. Usually ranking low on the scale of economic data, Wednesday's RBA FX reserves data may demand a little more attention, in light of recent data which shows the RBA are accumulating FX reserves in what appears to be a form of passive intervention. On Thursday all eyes will be on the October jobs data with early estimates show a net 500 new jobs created and the official unemployment rate edging up to 5.5 percent.