Currencies, for the most part, took a back seat in a largely so-so session for broader financial markets. Positive European and UK manufacturing data helped support sentiment. But investors appear to be in a holding pattern ahead of bigger event risks later in the week. China’s Caixin reading kicked off the round of global PMIs at 48.3 vs 47.6 expected. While continues to signal contraction, the details of the report are improving, with output and new orders on the up.

 
That, along with a strong CNY fix from the PBoC, should have been more supportive of the AUD that it actually was. The broader emerging markets complex benefitted from a sharply stronger Turkish Lira, which was at one point up 5.4% for the day, after AKP won a surprisingly decisive victory. The failure of AUD/USD to break above 0.7150 adds to the evidence that speculation around today’s RBA meeting has been a key contributor to its recent underperformance, especially against NZD.

 
Elsewhere, the UK manufacturing PMI jumped to a 16-month high at 55.5 (vs 51.8 exp), while final European PMIs slightly improved on their preliminary readings. The US ISM was virtually flat on the previously month at 50.1. Equity markets keyed off the improvement in global manufacturing, with the Euro Stoxx 50 up 0.5%. US equity markets benefitted further from a bout of deal-making, focussed on healthcare. Shire added to its portfolio by snapping up Dyax for up to $6.5b, its biggest acquisition yet. Pfizer is also rumoured to be closing in on Allergan.

 
Major currencies are generally very close to levels prevailing at the open yesterday. Commodity currencies sit at the tail end, as oil prices drifted lower after Russian output hit another post-Soviet high, worsening the global supply glut.NZD stands out as the clear underperformer, with NZD/USD off by 0.7% to 0.6730. Some of that weakness comes courtesy of drop in NZX dairy futures ahead of the GlobalDairyTrade auction tonight. NZD has enjoyed a period of outperformance of late, but looks at risk, especially if the RBA stands pat this week. NAB’s present-value model for AUD/NZD, which takes rate differentials as a primary driver, suggests that the cross should be much closer to a 1.10 midpoint.

Coming Up

All eyes on the RBA at 2.30pm AEDT. We expect the Board to leave rate settings unchanged, but are wary that the language could be tweaked to indicate more ‘scope’ to cut rates. With speculative short positions in AUD still large, and the market split on today’s outcome, we’d be braced for some (potentially significant) volatility. The market is pricing around a 40% chance of a 25bps rate cut while the Bloomberg survey shows that 41% of the economists surveyed expect a cut.

 
Later on, it is a quiet evening ahead of bigger events in the second half of the weekend. US factory orders will be the highlight, and are expected to fall after the drop in durable goods. Tonight also sees the GlobalDairyTrade auction. Our BNZ colleagues are looking for another modest decline, after the previous auction’s 3.1% fall. Dairy futures suggest some readiness for a decline, though the extent will be important.

 
And as a forewarning, Fed Chair Yellen’s scheduled appearance in front of lawmakers on Wednesday night is unlikely to prove enlightening for monetary policy. The House Financial Services Committee seems ripe to eat up its airtime with a debate regarding oversight of the Fed.

Overnight

On global stock markets, the S&P 500 was +1.20%. Bond markets saw US 10-years +4.31bp to 2.19%. On commodity markets, Brent crude oil -1.51% to $48.81, gold-0.6% to $1,134, iron ore -0.7% to $49.50. AUD is at 0.714 and the range was 0.7107 to 0.7154.

For full analysis, download report:

• Markets Today: 03 November 2015 (PDF,323KB)

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