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Forex Market Review – Swiss Gold Referendum

Swiss Gold Referendum

On Sunday the 30th of November, the Swiss public will vote in a referendum on how the Swiss National Bank should conduct its monetary policy. The Referendum, if successful, has the following goals:

  • The SNB should hold at least 20% of its assets in the form of gold.
  • The SNB should repatriate its gold holdings from overseas back to be held domestically in Switzerland.
  • Once acquired, the gold held by the SNB cannot be sold.

The vote is the result of Swiss policy, which allows a referendum to be called if 100,000 signatures can be gathered in support. The SNB and the Swiss government have both openly opposed the proposed reforms due to the limitations it places on monetary policy, while the vote has strong support from parts of the public – particularly lower to middle income earners.

The vote is important because it will change the way Switzerland conducts monetary policy, if enacted, and has the potential to cause some large price movements in both the Swiss Franc and Gold. With SNB gold reserves currently at around 1000 tonnes, the bank’s holdings are worth around 40 Billion Swiss Francs. However, in order to reach the 20% requirement imposed by the gold referendum the SNB would need to more than double its gold holdings, as the SNB’s total assets are over 500 Billion. Such a program would be likely to put upward pressure on the price of Gold due to both the direct purchases and those looking to profit from the central bank’s actions.

Since the SNB intervened in 2011 to cap the value of the Franc at 1.20 against the Euro, the market has rarely challenged the central bank. However with the gold initiative in play and the Euro weakening this year, the market is once again pushing EUR/CHF towards the 1.20 level:

Forex Market Review - Swiss Gold Referendum

When the vote goes to the people on Sunday, it will divide the nation between those in favour – predominantly lower and middle income voters and workers, for whom inflation and a weaker Franc does not provide much benefit – and upper income voters and business owners who benefit more from inflation, a weaker exchange rate and asset appreciation brought by easier monetary policy. Recent polls show both sides garnering strong support – receiving between 25% and 50% of the vote each, with the remainder undecided. The closeness of the vote particularly intriguing as it could go either way on the day.

Should the vote be successful and the reforms implemented, it is likely that the way the SNB operates would be fundamentally changed. While the initiative does not directly affect the functioning of the Franc cap, what it does do is create different incentives for the SNB towards future monetary policy developments, namely:

  • The policy would create an incentive towards other monetary policy strategies that do not rely upon balance sheet expansion: The exchange rate cap creates the situation where the SNB’s balance sheet is expanding, and as a corollary, it is a situation where the SNB’s gold reserves would also be expanding in order to maintain the 20% weighting. The SNB does not want an expanding gold reserve as each increase in Gold holdings on the balance sheet would be the new minimum Gold reserve level. Because of this the SNB would be more likely to pursue alternative measures such as negative deposit rates – strategies which weaken the Franc without necessarily expanding the bank’s balance sheet.
  • SNB portfolio rebalancing: There is no specific need to sell reserves to buy gold – the SNB can legally issue CHF deposits or interest bearing securities by expanding its balance sheet whenever it wants to increase reserves of EUR or Gold. However, since the incentive is to avoid balance sheet expansion at all costs, the SNB would likely attempt to offload EUR and other reserves to buy Gold when movements in EUR/CHF allow for it. This would be in essence a ‘sterilized’ purchase operation; sterilization would increase the speed of reaching the 20% criteria relative to purely CHF funded purchases. CHF funded purchases would increase the size of the balance sheet, meaning more must be purchased in total to reach the 20% Gold reserve level.Forex Market Review - Swiss Gold Referendum
  • Gold price volatility would result in a fluctuating balance sheet: Gold is a fairly volatile asset – particularly during times of financial distress. Daily changes in the price of gold can be in excess of 10%. A central bank bound by the proposed legislation be forced to rebalance in to gold if the price fell – to keep the value of gold at 20% of the bank’s assets. This means that when the price rises again, the SNB’s balance sheet would expand commensurately without control by the SNB; the bank cannot rebalance back out of the gold as the price rises. Traders have seen recently the effects of balance sheet expansion in the US and Japan, with large associated exchange rate moves; while a gold price induced expansion would likely be taken in a different light to expansionary easing, it would still be expected to cause FX portfolio rebalancing to some degree. Forex Market Review - Swiss Gold ReferendumForex Market Review - Swiss Gold Referendum

Whatever the outcome, traders will be watching closely and putting on positions before trading is locked out for the weekend. The most heavily affected pairs are likely to be the Swiss Franc, Euro and Gold – all of which could see massive volatility if the vote were to actually pass. Clients may wish to keep an eye out for the results as it may cause some large risks and opportunities over this coming weekend.

Forex Market Review – BoJ Minutes Lead to Yen Rally

The release of the Bank of Japan’s Monetary Policy Meeting Minutes proved to be a bearish catalyst for Yen based pairs yesterday, with USD/JPY declining three quarters of a cent in the hours that followed. From the document, traders focused on the discussion that some board members felt expanding the stimulus program increased the perception that the BoJ was funding the government budget deficit. With the BoJ taking up 80 trillion in sovereign bonds each year the pace of purchases will outpace new government issuance, however it must be kept in mind that purchases are on the secondary market. Despite a rising debt burden, yields on Japanese debt have continued to fall:

Forex Market Review - BoJ Minutes Lead to Yen Rally

Also of note yesterday was data out of the US, which gave conflicting signals. US GDP firmed slightly from previous estimates, with growth in the third quarter of this year now expected to have been 3.9% – up from 3.5%. The US dollar gained slightly on the news, before a strong rally in the Euro and Pound caused a reversal. While the move higher in the Euro did not appear to be based on any particular announcement, it did occur in the lead-up to a very weak US CB Consumer Confidence release; the index showed a reading of 88.7, which was down sharply from expectations of 95.9.

The UK will also release the secondary estimate of Q3 GDP tonight (11:30 Server Time), which is expected to remain in line with the previous estimate of 0.7% quarter on quarter. US Durable Goods Orders will also likely be a market mover (15:30 server time), with results of 0.5% and -0.4% expected for the Core and Non-Core figures respectively.

Heading in to Thursday, focus will be on Australian Private Capital Expenditures – which are due for 02:30 Server Time. In line with government forecasts, the decline in private investment is expected to continue this month with a -1.7% decline. The fall in investment in recent times has been largely driven by the end of the mining capital expenditures boom. With commodity prices declining sharply this year, and China moving to lower interest rates last week the release comes at a time of weak sentiment for the Australian dollar. The AUD reached 0.8513 yesterday – a post 2010 low – after the initial sentiment spike from the Chinese interest rate cut wore off.

Forex Market Review – SNB Concerned Over Gold Referendum

Swiss National Bank Chairman Thomas Jordan spoke again over the weekend, reiterating concerns that next weekend’s forthcoming Gold Referendum would limit the flexibility of the SNB to carry out monetary policy:

“… Would very greatly restrict our monetary policy room for manoeuvre, since the SNB only retains its full capacity to act when it is in a position to adjust its balance sheet to monetary policy requirement,” 

The gold referendum, if successful, would be the first step towards implementing a number of policies such as ensuring that the SNB holds at least 20% of its assets in gold, and that it can never sell that gold. While the policy is looked upon favourably by hard money advocates, the SNB is not in favour of the move as it will change the composition of SNB purchases and restrict its ability to decrease the size of its balance sheet in future. However, regardless of the referendum outcome the EUR/CHF cap is not expected to be threatened as a direct result.

Tonight’s main market moving event will likely be the German IFO Business Climate survey. Economists expect little change from last month’s 103.2 reading, forecasting 103.0. Sentiment in the survey has been on a decline since May, which coincides with the recent powerful decline in the Euro currency; similarly sentiment had been on the rise along with the Euro between 2012 and early 2014 after Mario Draghi promised to do ‘whatever it takes’ to save the Euro, with US QE pacifying markets. With QE over and the Euro plummeting, sentiment has been falling in lockstep. Analysts expecting the trend to continue this month:

Forex Market Review - SNB Concerned Over Gold Referendum

Bank of Japan Governor Kuroda will speak tomorrow after the release of the monetary policy minutes. Kuroda is expected to continue in his dovish tone and may justify the recent expansion in the BoJ’s stimulus program. Due to the short time between BoJ policy statements, these minutes are in fact those of last month’s Halloween meeting.

Bank of England Governor Mark Carney and Monetary Policy Committee members will testify ahead of parliament regarding last week’s Inflation Report. The Report was quite dovish last week, stating that inflation could fall below 1% towards the end of the year. If the meeting continues in the tone of the Inflation Report, the Pound could again take a fall on weakening rate hike expectations.

Forex Market Review – Yen Volatility Spikes BoJ and Jawboning

Wednesday’s FOMC minutes was not easy to gauge – conflicting parts of the document meant it could be read as either hawkish or dovish. The mixed nature of the release showed in the price action that followed; currencies spiked initially higher against the US dollar, however in the following hours the US dollar regained strength to continue its recent momentum.

The minutes highlighted the need to keep an eye on longer term inflation expectations as well as market-based measures. The recent decline in break-even inflation rates occurred as US long term bonds rallied, however the committee sees survey based measures as stable. The FOMC decided against making comment on financial markets in its October statements, playing down the ‘Yellen put’:

“In addition, members considered the advantages and disadvantages of adding language to the statement to acknowledge recent developments in financial markets. On the one hand, including a reference would show that the Committee was monitoring financial developments while also providing an opportunity to note that financial conditions remained highly supportive of growth. On the other hand, including a reference risked the possibility of suggesting greater concern on the part of the Committee than was actually the case, perhaps leading to the misimpression that monetary policy was likely to respond to increases in volatility. In the end, the Committee decided not to include such a reference”

Thursday’s CPI release was marginally stronger than expected, with Core CPI showing an increase in line with expectations of 0.2% and broader inflation remaining unchanged; analysts expected a slight fall in the Consumer Price Index of -0.1% month on month. Year on year changes remain below the Fed’s target of 2% with Core Inflation at 1.8% and Inflation at 1.7%, indicating that there is not yet strong pressure for the Federal Reserve to act on rates:

Forex Market Review - Yen Volatility Spikes BoJ and Jawboning

The USD/JPY has had a volatile week; after falling 100 pips on Monday’s GDP release, the pair rallied over 300 pips higher on confirmation that the Bank of Japan would continue its monetary policy on the same trajectory as the previous announcement. Long USD/JPY appeared to be the only game in town until Japanese Finance Minister Aso threw cold water on the trade this morning. Aso commented that the recent Yen sell-off had been too rapid:

“Sudden currency changes aren’t welcome, whether it’s up or down.” Aso remarked, “Over the past week, the yen-dollar rate has weakened too fast – that is clear,”

The Yen gained another half a cent against the dollar following the remarks, bringing the decline from the recent peak of 118.97 to over one and a half cents.

Thursday’s global PMI data was expected to be broadly positive, however the figures confirmed much weaker expansion than forecast across China and Europe. HSBC China Flash Manufacturing PMI showed the manufacturing sector in China is balancing on the point between expansion and contraction with a reading of 50.0. European PMI’s missed expectations, with Europe as a whole recording 50.4 and 51.3 for manufacturing and Services PMI respectively; economists had forecast readings of 50.9 and 52.3. The Euro sold off half a cent following the release, however later regained this movement to reach 1.2560 overnight.

Forex Market Review – Market Awaits the BoJ

Japan continues to be the theme of the week after Prime Minister Abe called for snap elections yesterday, along with a delay to the previously planned sales tax increase. Both announcements were widely expected by market participants, however the announcement was still able to spark a panicked rally in the Yen overnight of 50 pips against the US Dollar before the USD/JPY uptrend resumed, reaching 117.00.

At a press conference yesterday Abe told reporters “I have decided not to raise the consumption tax to 10 percent next October and I have decided to delay a consumption tax hike for 18 months…” This means that the tax hike is delayed until April 2017, however Abe was clear that the sales tax increase would not be delayed a second time and would proceed at this date with the rate increasing to 10%. The delay is largely due to the worse than expected outcome from the most recent sales tax increase, which is thought to have been a large contributor to Japan’s recent dive into a triple-dip recession.

Abe also called for snap elections to be held in December, expected for the 14th, with the current parliament to be dissolved on November 21st. Abe will attempt to cash in on recent popularity, however in the wake of poor economic performance it is not clear whether the populace will remain in support of ‘Abenomics’ – the PM’s three pronged approach to reinvigorating the Japanese economy.

Yen pairs are holding near their recent highs ahead of today’s Bank of Japan Monetary Policy Statement and press conference; the market may be pricing further stimulus measures in the wake of the recent terrible Japanese data. The policy statement is tentative, however it is usually expected sometime after 04:00 server time with the press conference to follow. The BoJ is expected to hold stimulus steady for now, with the monetary base increasing at a rate of 80 trillion Yen per annum:

Forex Market Review - Market Awaits the BoJ

Data out last night confirmed that inflation in the United Kingdom remains low, at 1.3% but higher than analysts were forecasting at 1.2%. The data caused a slight rally in the Pound of around a quarter of a cent against the US Dollar, however this did not last long as the Pound fell though the US session by over half a cent. The fall comes ahead of tonight’s Bank Rate Vote release, where the voting patterns of the Monetary Policy Committee. Analysts are expecting the composition of voting members to remain steady with 2 members calling for rate increases and 7 for rates to be held at 0.50%.

To reiterate Monday’s report, the Federal Reserve will release the FOMC minutes from October later today. The Federal Reserve is not meeting this month to change policy, so the minutes are the main indication this month as to any changes to be expected at December’s FOMC statement.  Analysts are expecting that Chairwoman Janet Yellen will use the December statement to change the wording on interest rates, due to the accompanying press conference which can be used to explain the change. This release has the potential to be market moving if the minutes reveal new concerns about financial markets, or indicate strong opinions on the future path of monetary policy. It will also show the extent to which the current policy path is dividing opinions within the FOMC.

Through the end of the week, traders will be looking to PMI figures out of China and Europe for direction. HSBC China Manufacturing PMI will be released during early trading on Thursday; the number is expected to remain in expansion territory at 50.2, however with data coming out of China consistently weak and house prices broadly falling across the country it may take a little more to turn around the current weakness in Iron Ore prices and broader commodities. European PMI’s are expected to remain mostly in expansion or improvement from last month as stimulus measures take effect.

Forex Market Review – Japan in Recession

Despite the Bank of Japan’s audacious stimulus program, the world’s third largest economy is back in recession according to preliminary growth figures. The GDP data, which was released this morning, showed a contraction in Japanese GDP of -0.4% while economists were expecting far better number at 0.5%. The number comes in the wake of Halloween’s surprise stimulus expansion, and ahead of tonight’s decision regarding whether or not to delay a sales tax rate increase. The Yen initially fell half a cent against the US Dollar, before reversing and gaining over a cent to reach below 115.50 in a counter-intuitive move.

Forex Market Review - Japan in Recession

The decline in economic activity in the country is the second quarterly decline in a row, which means that Japan has technically entered a new recession – it’s third since the GFC ended. The data highlights the uphill battle which BoJ Governor Kuroda and the Prime Minister Abe have faced in turning around the fortunes of the country; a stimulus program three times the size of US QE as a proportion of the economy has been unable to spark sustained real growth. Other factors such as a declining workforce, aging population and aversion to credit have prevented the monetary measures from making substantial gains outside of a strong exchange rate depreciation. Despite the rally in USD/JPY the pair remains historically quite low:

Forex Market Review - Japan in Recession

A sales-tax panel will meet today to discuss a delay to the new increase, with an announcement set to follow at around 08:00 server time today. This announcement could be a market mover, however with the market well aware of the poor figures today it is likely that the surprise is priced in. Traders will also be looking towards the Wednesday Bank of Japan Monetary Policy Statement to see if any new measures are announced or to assess dissent within the ranks of the BoJ.

On Tuesday, the UK releases its CPI figures for the month. After last week’s inflation report confirmed expectations that inflation will continue to fall, economists are expecting a weak figure of 1.2% in line with last month’s inflation rate. Last week the Inflation Report indicated that towards the end of this year inflation could move below 1%, precipitating a powerful decline in the Pound.

Following the Bank of Japan’s monetary policy decisions on Wednesday, the FOMC will release the minutes from October’s FOMC meeting at which the committee announced the end of asset purchases for the current round of QE. The Federal Reserve is not meeting this month to change policy, so the minutes are the main indication this month as to any changes to be expected at December’s FOMC statement.  Analysts are expecting that Chairwoman Janet Yellen will use the December statement to change the wording on interest rates, due to the accompanying press conference which can be used to explain the change. This release has the potential to be market moving if the minutes reveal new concerns about financial markets, or indicate strong opinions on the future path of monetary policy.

Forex Market Review – Pound Falls on Declining Inflation Expectations

The Pound fell sharply on Wednesday after the release of the Bank of England’s Inflation Report, which indicated inflation was likely to fall below 1% in the next six months. The UK currency dropped by two cents against the US Dollar on the release. From the report:

“The main change to the MPC’s projections is that the near-term outlook for inflation is materially lower than we had expected in August.

The near-term weakness means that it is more likely than not that I will have to write an open letter to the Chancellor in the next six months on account of the inflation rate falling below 1%.

The recent softness in inflation reflects a range of factors:

  1. The sharp fall in global commodity prices;
  2. More broadly, weaker inflationary pressures in our main trading partners;
  3. The past appreciation of sterling, and its continuing effect on imported inflation, which has subtracted around ¾ percentage point from CPI inflation over the past year; and,
  4. Weak domestic inflationary pressures, reflecting the margin of spare capacity that has been present in the economy for some time. Unit labour costs have been flat, despite subdued productivity growth, as a result of the pronounced weakness of wage growth.


The best collective judgement of the Committee is that inflation is likely to remain close to 1% over the next year.”

Forex Market Review - Pound Falls on Declining Inflation Expectations

Inflation in the UK is expected to continue declining through the end of 2014

Since Governor Carney indicated earlier in the year that interest rates could rise sooner than the market expected, the statement has been thoroughly rejected by the market. Inflation and weaker economic data weighing on expectations and pushing the market implied rate increase out to the second half of 2015. This latest forecast of inflation has added to the turnaround in expectations.

Employment data released prior to the Inflation Report was mixed, with the number on unemployment claims falling by a smaller amount than expected at -20,400 as well as the unemployment rate moving upwards from 5.9% to 6.0% in a surprise to markets. However, the negative data was offset by a greater than expected rise in Average Earnings of 1.0% which was enough to cause a slight rise in the currency, though this only lasted until the doveish Inflation Report.

Forex Market Review - Pound Falls on Declining Inflation Expectations

UK wages growth has improved in recent months


In other news of note, Chinese Industrial Production data declined noticeably – falling from 8.0% to 7.7% in this month’s release; both Fixed Asset Investment and Retail Sales were also lower than expectations by 0.1% at 15.9% and 11.5% respectively. Despite the weakness of the data, the Australian dollar reacted positively to the news, rising by around three quarters of a cent against the US Dollar. This gain followed earlier losses due to a comment by Assistant RBA Governor Kent stating that intervention had not been ruled out to control the strength of the AUD; the comments sparked a sell off of half a cent.

For today’s trading the focus will be on European growth figures, for which major economies France and Germany are both expected to move back in to positive growth of 0.1% after flat to negative growth previously. Retail Sales numbers from the US are also likely to be a market mover; last month a surprisingly bad release was responsible for a short squeeze in EUR/USD of 250 pips. Economists expect an increase of 0.2% month on month for both the Core and Non-Core data.

Forex Market Review – Yen Sells Off On Rumours

Yen pairs continue to gain strongly against the Asian currency in the wake of its surprise Halloween stimulus expansion. Fuelling the Yen sell-off was an overnight rumour that Japan’s second planned tax hike was to be delayed; this was sparked by speculation that Prime Minister Abe would call an early election and dissolve parliament this month. Such a move would be intended to take advantage of current popularity, rather than allowing for Abe’s approval rating to decline by the time the next election would take place. The Yen sold off sharply in early trading today, with USD/JPY breaching the 116.00 level and AUD/JPY exceeding 100.00 for the first time since mid-2013.

The RBZN released its Financial Stability Report overnight, providing a comprehensive review of economic risks to New Zealand and international markets. The document confirmed that Loan to Value Ratio macro-prudential controls are still an appropriate policy to control house price gains. The statement also spoke about the continued room for falls in the NZD, and what might drive them:

“The Reserve Bank’s analysis indicates that the real exchange rate is above its sustainable level and also above levels justified by business cycle factors. Relatively high interest rates in New Zealand, the global search for yield and the associated demand for NZD-denominated assets are key reasons for the elevated exchange rate.

The NZD could decline further if a stronger outlook for the US economy triggered greater investor flows into the US dollar on the expectation that the Federal Reserve would begin to tighten sooner than currently expected.

In addition, further declines in New Zealand’s export prices, or a sharp slowing in Chinese growth, would also place downward pressure on the exchange rate. More generally, a significant deterioration in global financial market conditions could reverse the current appetite for NZD-denominated assets.”

RBNZ Governor Wheeler reiterated that the exchange rate had further to fall. The attempt at jawboning the currency lower was interrupted by the announcement of Fonterra’s milk price payout at $5.55-5.65; $5.30 per kilogram in 2015 plus 25-35 cents a share. This was higher than expected, and the NZD rallied a quarter of a cent on the announcement. Dairy prices have been in decline since early this year:

Forex Market Review - Yen Sells Off On Rumours

The Earnings Index is expected to grow strongly by 0.9%, continuing month’s gains of 0.7%. Unemployment Claims and the Unemployment Rate are also expected to improve, with economists forecasting the number of claims to fall by 24,900 and the jobless rate to decline from 6.0% to 5.9%. BoE Governor Carney will also speak at the release of the bank’s Inflation Report, which comes one hour after the employment release. The release may indicate a shift in the bank’s expectation of when rates will increase.

Forex Market Review – US Dollar Sells Off on Weak NFP

A worse than expected Non-Farm Payrolls number sparked a small sell-off in the US dollar, resulting in strong rallies across the Euro and Pound, which both gained over a cent against the US Dollar. The US employment data showed only 214,000 new jobs were added – less than the expected 235,000 that analysts expected. The Unemployment Rate fell slightly, at 5.8, which was an improvement on last month’s 5.9%. It was interesting to note that the US stock markets did not follow through with a rally in the same way as currencies, indicating that the asset correlation may be shifting now that QE’s end has been finalised.

The Canadian Dollar also gained strongly on Friday, as the Canada’s own employment data showed strength; released at the same time as Non-Farm Payrolls. 43,100 new Jobs were added in October, down from last month, but a large positive shock to expectations of -3,900 jobs. The Unemployment Rate also declined strongly, down from 6.8% to 6.5%. The strong data led to a rally of over a cent against the US dollar.

As usual, the second week of the month is a little quieter for central bank data, however announcements out of New Zealand and the UK should provide some trading opportunities. At the end of Tuesday’s trading day, the RBNZ will be releasing its Financial Stability report and Governor Wheeler will speak in the following minutes. The Stability Report is a similar document to last week’s RBA quarterly statement, though the New Zealand document is released only twice per year; it details risks within the New Zealand economy as well as internationally, and is usually a good source of information on how the bank is thinking. Governor Wheeler may take the opportunity to jawbone the currency lower again.

On Wednesday, the UK reports its employment data. The Earnings Index is expected to grow strongly by 0.9%, continuing month’s gains of 0.7%. Unemployment Claims and the Unemployment Rate are also expected to improve, with economists forecasting the number of claims to fall by 24,900 and the jobless rate to decline from 6.0% to 5.9%. BoE Governor Carney will also speak at the release of the bank’s Inflation Report, which comes one hour after the employment release.

Forex Market Review – ECB Set to Begin ABS Purchases

The ECB press conference continued in the recent doveish tone, with Draghi stating that the ECB would soon begin its ABS purchase program. Interest rates were kept at the same levels, as expected. Recent reports that there was substantial dissent within the council were put to bed, with the members unanimous in today’s vote.

The key market mover was the announcement that the ABS program was scheduled to take place soon, and last 2 years. On the announcement, the Euro began to fall against the US dollar – declining by over one and a half cents. Draghi also reiterated that both the ABS program and TLTRO’s would have a sizeable impact on the ECB’s balance sheet. He also clarified that by ‘back to 2012 levels’ he was referring to the ECB’s balance sheet in March 2012, just after the completion of the LTRO’s at that time.

Australian employment data showed a modest improvement yesterday, however the market continued in its recent pattern of disregarding the ABS data – oscillating in a 50 pip range but failing to generate a strong directional impulse. Total employment increased by 24,100 – which was better than the expected 20,000; of this amount 33,400 came from new full-time jobs which was offset by a decline part time jobs by 9,400 to give the net figure. The Unemployment rate remained steady at 6.2%.

The RBA today released its quarterly Monetary Policy Statement, which is a good source of information on the current state of markets, as well as the RBA’s own view of the Australian economy and interest rates. The release was much unchanged from the previous release and in line with this month’s rate statement; it failed to generate a strong reaction in the AUD. The RBA expects growth to remain in the 2-3% range through to June 2015, increasing to 2.75-3.75% through to June 2016. The weak growth continues to be a factor related to the sharp decline in mining investment following the peak of the investment boom – a weakness expected to continue over through next year:

Source: Reserve Bank of Australia

Source: Reserve Bank of Australia, Australian Bureau of Statistics

While growth is modest, the RBA continued with its expected guidance that a period of interest rate stability was to be expected. Futures markets support this out 12 months, and with underlying inflation expected to remain at the lower boundary of the RBA’s 2-3% band until the end of 2015 rate increases still appear to be some distance away. Inflation was slightly higher than the previous estimate, however this was mainly due to the fall in the AUD rather than due to stronger demand:

Source: Reserve Bank of Australia

Source: Reserve Bank of Australia, Australian Bureau of Statistics

The RBA also notes that while volatility in developed market currencies has picked up recently, it is still low by historical standards. With the AUD’s fall since September, daily volatility in the currency has returned to a long term average range – which will be a welcome sight to traders who endured the placid markets of early 2014.

With most of the important central bank decisions completed for the week, focus will fall on the release of US Non-Farm Payrolls tonight. The employment release will be the first since the end of Quantitative Easing, and it is yet to be seen whether correlations will change as a result. A bad employment number may still cause a sell-off in the US dollar, however whether stock markets also rally as they have under quantitative easing is an unknown. If this changes due to the finality of the stimulus program being ended, we could see some asset correlations changing. Analysts expect the unemployment rate to remain on hold at 5.9%, and for employment to increase by 235,000 jobs.

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