(07NOVEMBER 2017)DAILY MARKET BRIEF 1:RBA maintains its wait-and-see approach

The US dollar extended gains against all of G10 currencies on Tuesday. The gains were quite limited as investors awaited several key speeches today. Draghi will speak at GMT 9 am, while across the Atlantic Poloz (BoC) will give a press conference this evening. In Australia, the central bank (RBA) held the Cash Rate Target unchanged at record low 1.5%. Governor Lowe made few changes to the statement and maintained its growth forecast of around 3% over the few next year. The RBA also expressed its concerns about the weakness in inflation (CPI eased to 1.8%y/y in the third quarter, down from 1.9% in the previous one) and reiterated its warning that further strength of the Aussie could only worsen the situation.

The Reserve Bank of Australia finds itself in a tricky place, as the economy kept improving and reducing its dependence to the mining sector, while on the other hand a few indicators such as inflation and retail sales are sending mixed signals. The RBA will wait patiently on the sidelines for a long-time. The market is not pricing any rate hike before at least the end of the summer 2018. Against such a backdrop, the risk is significantly skewed to the downside in AUD/USD. However, upside risk is not zero as an positive surprise in inflation together with another disappointment regarding Trump tax plan could trigger an AUD rally.

AUD/USD is currently testing the key 0.76-0.77 area and has been unable to validate a break of the $0.77 resistance (200dma). The USD rally is losing steam amid a lack of positive news in the US. Therefore, a return towards $0.78 appears likely in the short-term. In the longer-term, we maintain our bearish view.

By Arnaud Masset