AUD up as RBA goes to “wait and see;” ECB board candidate hearings

Rates as of 07:00 GMT

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Market Recap

The Reserve Bank of Australia kept rates on hold, as was widely expected. I’m surprised to see how the AUD strengthened on the news even though no one thought they would cut. The key here must be that the RBA said that due to “the long and variable lags in the transmission of monetary policy,” it decided to hold rates steady “while it continues to monitor developments, including in the labour market.”

In other words, the RBA has joined the “wait and see” crowd while it assesses the impact that its easing so far will have on the economy. The rule of thumb is that usually it takes two to three quarters for the effect of easing to permeate the economy. The RBA cut the cash rate in half in six months, from 1.5% last May to 0.75% in October. Now it’s time to wait to see how that affects the economy. As the graph shows, the market now thinks there’s less of a chance of easing at any time over the next year – although it still believes a rate cut is likely, the odds of two or more cuts fell to 37% from 45%, while the odds of rates either staying the same or only one more cut rose.

It’s unusual that both CHF and JPY would be higher on a day when AUD and NZD lead the way. Probably that’s because AUD was up on distinct Australian factors and NZD continued to appreciate vs AUD (although AUD/NZD took a pop up when the RBA announcement came out). CHF and JPY however were moving on general “risk off” sentiment as stocks in Asia were generally lower in reaction to Trump’s tweet that he would reinstate tariffs on steel and aluminum from Argentina and Brazil. To make matters worse, Commerce Secretary Ross subsequently told Fox Business News that Trump will raise tariffs on China if nothing happens between now and 15 Dec.

USD was lower following Monday’s disasterous US manufacturing ISM index, which not only fell unexpectedly, but both the employment and new orders indices were lower too.

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Today’s market

A quiet day indeed.

The main event is not indicators but rather two of the future members of the six-member ECB Governing Council will appear before the European Parliament’s Committee on Economic and Monetary Affairs.

First up is Fabio Panetta, the Senior Deputy Governor at the Bank of Italy (the Bank’s #2 person). He’s Italy’s nominee to replace France’s Benoit Coeure.

Much of Panetta’s experience at the Bank of Italy has been in dealing with the country’s troubled banking system and helping to rescue banks that were in trouble, of which there is no shortage in Italy (exhibit A: Banca Monte dei Paschi di Siena SpA). He’s criticized the way the European authorities dealt with Italian banks, arguing that the rules imposed on them aren’t suited to the country’s banking system. He also opposed “bail-in rules, which ensure that shareholders and creditors shoulder some of the cost of rescues along with governments. I’m sure he will have some animated conversations with his new colleague, Bundesbank President Jens Weidmann.

(Mr. Coure will speak at an event in Brussels this evening, but there’s no indication whether this will be a substantial policy speech or simply a farewell event.)

Next we have Isabel Schnabel, Professor of Financial Economics at the University of Bonn and Member of the German Council of Economic Experts.  Her research focuses on financial stability, banking regulation, international capital flows, and economic history. She’s slated to replace Sabine Lautenschläger, another German, who was Vice-Chair of the ECB’s Supervisory Board, which supervises the banking system. Lautenschläger had been a vocal critic of the ECB’s quantitative easing (QE) program. She quit the ECB Board in September, the third German member to do so before the end of their term. Her roles on the Supervisory Board and the Single Supervisory Mechanism (SSM), the EU bank licensing authority, are now held by Yves Mersch. His term on the Executive Board ends in December 2020. It’s not clear (to me at least) whether Schnabel will take over his duties at that point, but I would imagine so, especially considering the criticism that the ECB has received for not having enough women in positions of power. Mersch, who’s from Luxembourg, has been relatively hawkish on interest rates but publicly supported the ECB’s QE program. The market will be curious to hear what if anything Schnabel has to say on this matter. Will she continue to plow the furrow of Teutonic monetary rectitude that her countrymen traced before her, or will she go along with the majority view?

Aside from that, the European and US days are virtually devoid of interest.

The UK construction PMI was always a second-tier announcement, and now that Markit is producing a preliminary version of the UK manufacturing and service-sector PMIs, which are both out already, this is likely to fall even further between the cracks – especially when the election is now less than 10 days away. Anyway both the manufacturing and service-sector PMIs fell in November, although the final manufacturing index was revised up somewhat. It will be nice if this index manages the small gain that the market is looking for, but frankly it’s so far below the 50 line that I don’t think it matters. GBP neutral or even negative as it’s not showing any substantial recovery from the current low levels.

After that, we have to wait until the Asian day starts up and Australia announces its Q3 GDP. The day after the Reserve Bank of Australia (RBA) met, this might not have as much impact as if it were coming right before a meeting and could affect the policy decision. The next RBA policy meeting isn’t until 4 Feb., so there will be more indicators than usual out before that one (the RBA holds 11 meetings a year, January being the only month when they don’t meet). Growth is expected to continue at the same qoq pace as before, in fact to the same as in Q1 and Q2. However, I wonder if the figures might beat expectations. The RBA yesterday said that “After a soft patch in the second half of last year, the Australian economy appears to have reached a gentle turning point. The central scenario is for growth to pick up gradually to around 3 per cent in 2021.” Maybe they know something we don’t? AUD positive, perhaps.

After Saturday and Monday’s better-than-expected China PMIs, today’s Caixin service sector PMI is expected to be little changed and probably won’t attract that much attention.

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