Market Watch, Oct. 30

Previewing global inflation data, and the likely pressures on our dollar.

This is a week of two halves. Halloween on Tuesday signals the end of a bumpy October, and on Wednesday we roll over into November, a month that historically sets up the coming calendar year.

Recapping October

October began with a bang. At the start of the month, consumer confidence was noted as recovering from a 10-month streak of pessimism. We also discovered employment is on track for the biggest jobs boom since – that's 335,000 jobs and counting – and net exports are still expanding. However, last week's Consumer Price Index (CPI) and Purchasing Price Index (PPI) figures have thrown some doubt into the economic equation. Once again, there's been no materialisation of price increases in Australia – and this adds a headwind to growth.

Now we wait for Australia's inflation story to spiral into a global edition by the end of the month. We won't be privy to anymore economic data in Australia before the end of the month, but both Europe and the US will publish their CPI prints by Tuesday night. Concentrate on the Australian dollar after both these CPI prints are released to better understand the effect disinflation is having globally, as the Australian dollar is a risk currency.

Inflation and the world

Looking to Europe first, the comments made by European Central Bank (ECB) President Mario Draghi last Wednesday would suggest inflation is as elusive in the Eurozone as it is in Australia. In his statement, he noted the ECB would support the Eurozone for the foreseeable future, and made comments on interest rates remaining “well past the horizon of the net purchases”. Net purchases relate to the ECB's quantitative easing program, which reveals the inflation spiral is a global one that is incredibly hard to break out of.

Where can investors look for guidance? Reviewing the euro against the Australian dollar is probably not the best option to gauge central bank and economic differentials. It's better to consider the pairing of the euro and the US dollar instead. If inflation is weak, as expected, the EUR/USD should decline further. It would likely fall in the favour of the US dollar and put downward pressure on the Australian dollar.   

It's a slightly more complicated relationship than that, however. A lower Australian dollar is critical for inflation in Australia to break out. Remember, there's a great number of US-denoted operations and contracts in Australia – a lower Australian dollar would increase revenue for those exposures and should filter back into the economy and inflation.

What's in store for November?

Now let's look to the start of November. No economic data is of real significance here besides US non-farm payrolls.

The core mandate of the US Federal Reserve is for continuing employment growth. A strong non-farm payroll read could support the Fed's rate rise expectations. The Fed is currently tipping four rate rises over the coming 14 months, but the likelihood of this hasn't been as significantly priced into the market.

Non-farm payrolls could lift the US dollar, which has been weakening for six months, across the board. That would put more pressure on the Australian dollar. Watch for possible movements at the cross of the Australian dollar and US dollar to the mid-70c range if non-farm payrolls are solid.

November is not only the month of ‘the race that stops the nation' – the Melbourne Cup – but it has historically been the month with one of the highest probabilities of rate movements from the Reserve Bank of Australia. Not this year!

However, it is likely this week's global data, coupled with last week's inflation data, will cause a shift in the RBA's outlook for inflation and growth. That shift should be evident in the statement.

There is even whisper on the streets the RBA could go dovish again. After spending more than a year in a holding pattern, is there a chance the next move could be a cut?

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