Retail Sales Tanks the AUD, with the ECB minutes and FED Talk to Drive the EUR and USD

Earlier in the Day:

Macroeconomic data was on the lighter side through the Asian session, though certainly not immaterial with August trade and retail sales data out of Australia.

The RBA had struck a less hawkish than expected tone earlier in the week, with concerns over soft inflation and a stronger AUD seeming to temper RBA Governor Lowe’s hawkish outlook on the economy and monetary policy.

This morning’s stats were mixed, with retail sales slumping 0.6%, whilst the trade surplus widened more than forecasted to A$0.989bn. The AUD moved took a hit, falling from $0.78551 to $0.7836 upon release of the data, with the disappointing retail sales figures pulling back the AUD in the early part of the day.

We have seen the ASX200 reverse this year’s declines in recent weeks and AUD strength will likely have influenced, with declines being relatively broad based.

The AUD was down 0.47% at $0.7828 at the time of writing and much like the Nikkei, we could begin to see some correlation between the AUD and the ASX200 over the near-term. The big-4 banks will continue to have the largest weighting and, with any hopes of a move by the RBA likely to continue to be dependent upon the direction of the AUD, together with labour market, economic growth and inflation projections, any material rally in the ASX200 may be on ice for now.

For the Kiwi Dollar, there will be a close eye on Prime Minister English and Labour Party leader Ardern, both of whom have approached NZ First leader Peters to discuss terms to form a government. A possibility remains of a labour led coalition, with Ardern looking to form government with NZ First and the Greens, whilst the National Party just needs NZ First to cross the line. NZ First leader Peters stated that he would announce which party he would form a government with on 12^th October, which doesn’t give the National or Labour Party much time to get to the negotiating table. The uncertainty will certainly weigh on the Kiwi Dollar, which has already been under pressure with a shift in sentiment towards the New Zealand economy and monetary policy.

The Kiwi Dollar was down 0.21% at $0.7153 at the time of the report, with the BoJ enjoying the Dollar’s recovery and risk on sentiment, the Yen down 0.03% at ¥112.73 against the Dollar. The markets will be looking ahead to this month’s General Election, but for now Prime Minister Abe looks set to take the election, with newly formed Party of Hope lacking any hope, if the polls are anything to go by.

The Day Ahead:

There’s very little out of the Eurozone this morning, with the markets likely to be looking ahead to this afternoon’s release of the ECB’s monetary policy meeting minutes, in search of clues on when the ECB will begin to taper the asset purchasing program and by how much. There may be disappointment in the minutes, which could weigh on the EUR through the afternoon, ECB members having voiced concern over the strength of the EUR and wanting to avoid any market response in advance of the actual event.

With little else for the markets to focus on through the early part of the European session, we can expect the EUR to be particularly sensitive to the tone of the minutes, the EUR rally having hit a wall following the German Election result and the Catalan Independence Referendum last weekend.

From Germany, Merkel looks to be taking the first steps to ease coalition discussion pains, with talks of a first German immigration law, which comes off the back of pressure from the CDU’s sister party, the CSU. The Green’s co-leader welcomed the news, the Green Party having been in favour of an immigration law for quite some time. An easing in geo-political tension will provide support to the EUR, though the markets will also be looking ahead to Monday, when Catalonia is expected to declare independence from Spain, which could lead to further violence, with Spain’s Prime Minister Rajoy likely to be in the spotlight once more.

With no material stats out of the UK this morning, the only ray of hope through the week has been the uptick in service sector activity in September and, with the services sector accounting for the lion’s share of the UK economy, all is not lost, though Theresa May’s closing speech on Wednesday may be seen as a negative, few impressed by the British Prime Minister’s attempts to rally the troops.

Perhaps BoE Monetary Policy Committee members Haldane and McCafferty can give the Pound a boost late in the day should either support a near-term move following the weaker manufacturing and construction PMIs in September.

Across the Pond, it will be a more interesting afternoon with August trade and factory order figures scheduled for release together with the weekly jobless claims numbers. We will expect the stats to be Dollar positive through the day, though the direction of the Dollar will not just be dependent on the stats, with FOMC member’s Harker, Powell and Williams scheduled to speak through the day. Powell is in the race for the top spot at the FED, so any comments on policy will be of interest, particularly when considering the fact that the markets have labelled him as the dovish candidate.

Uncertainty over who will take the top spot will linger in the markets through the day, but following the impressive service sector data out of the U.S on Wednesday, support for the Dollar is likely to be there ahead of tomorrow’s labour market data.

At the time of writing, the Dollar Spot Index was down 0.11% at 93.557, direction hinged on today’s stats, with the EUR up 0.03% at $1.1756 and the Pound up 0.11% at $1.3234.