EUR Consolidates Losses, AUD Still High Says RBA

Forex markets saw the USD slightly weaker in the G10. The RBA's Monetary Policy Statement reiterated the need for the period of steady rates, revised up its mid-2015 to end-2016 inflation forecast ranges by 0.25 percentage point due to lower AUD and highlighted that the Aussie is still high. AUD/USD extended weakness to 0.8541, bearish momentum strengthened. The bias remains on the downside, while the short-term moves will be contingent on US labor data due today. A strong read should place 0.85 support at risk. Offers are seen at 0.8600/43 (optionality / former year low).

As expected, the BoE kept its bank rate steady at the historical low of 0.50% and its asset purchases target unchanged at GBP 375bn. GBP-complex gave little reaction post data. In foreign exchange markets, the cable broke 1.5855/75 support zone and sold-off to fresh year low 1.5817 in Asia. Yesterday's close below 1.5957 turned MACD (12, 26) negative, suggesting further extension of losses. Next week’s inflation report (Nov 12th) and the release of meeting minutes (Nov 19th) will be the key drivers on GBP-complex for the month ahead. The slack in wages growth and the subdued inflation dynamics clearly buy time for the BoE before starting tightening rates. The implied probabilities extracted from interest rate markets show that expectations for a first BoE rate hike are now postponed to June 2015 (from Feb’15 previously). Dovish shift in BoE bets continue weighing on the Cable. The 3-month cross currency basis confirms increasing future preference for USD.

Across the Channel, the ECB also maintained status quo as expected. EUR-rates remained unchanged: main refi rate at 0.05%, deposit rate at -0.20% and the marginal lending rate at 0.30%. The highlight of ECB President Draghi’s speech has no doubt been the ECB officials’ unanimity to add more stimulus if needed. The ECB is now "timely" preparing field for more unconventional measures. This clearly points out to the possibility of a QE in 3-6 month period, should the inflation expectations do not improve despite the implementation of TLTRO, covered bond and ABS purchase programs. In our view, the moderate growth outlook, the delay in structural reforms, subdued wage growth and high unemployment levels should further weigh on inflation dynamics in the Euro-zone, increasing probability of further action from the ECB. EUR/USD legged down to a fresh low of 1.2396 during Draghi’s press conference yesterday. Asian traders pulled the pair down to 1.2365. The bias remains solidly negative on EUR. The solid dovish ECB stance opens the way toward strong support 1.2043 (July 2012 low) on EUR/USD.

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The ECB/BoE divergence remains in favor of the pound sterling. Post ECB/BoE, the short-term technicals point the downside, offers abound at 0.7870/0.7915 (area including daily Ichimoku cloud cover 0.78721/0.79163, 21 & 50-dma and option barriers). The key support stands at 0.77666/72 double bottom on Sep 30th / Oct 1st. The 3-month (25-delta) EUR/GBP risk reversals have spiked to end-2008 levels in September. We are now back below zero suggesting that the mid-run view remains negative on EUR/GBP.

Today’s main fx trading strategies are focused around the US labor data. Since the Fed shifted to a more data-dependent game plan to determine the timing of its first FF rate hike, the quality of data will be important for the short-term USD direction verse G10 and EM currencies. The expectations are optimistic: the US nonfarm payrolls are expected at 235K, the unemployment rate is seen unchanged at 5.9%. The average hourly earnings are expected to have improved 0.2% on month to October (vs. 0.0% a month ago). A read in line with market optimism should push USD and US yields higher before the weekly closing bell.

Traders also watch: Swiss October Unemployment Rate and Foreign Currency Reserves, Swiss September Retail Sales y/y, German September Industrial Production m/m & y/y, German September Current Account and Trade Balance, Exports and Imports m/m, Spanish September Industrial Output m/m & y/y, French and Norwegian September Industrial and Manufacturing Production m/m & y/y, French September Budget and Trade Balance, Swedish September household Consumption m/m & y/y, Swedish October Budget Balance, UK September Trade Balance, Canadian October Unemployment & Participation Rate, US September Consumer Credit.

Swissquote SQORE Trade Idea:

TTR CA Daily Model: Sell XAG/USD (Silver/USD) at 15.283.