FX market outlook

FX market outlook

Aussie surges as RBA holds policy and China PMI jumps.

News and data out during Tuesday’s Asian session kept sentiment upbeat. The Australian dollar saw some notable moves due to strong China manufacturing PMI data and a decision by the Reserve Bank of Australia to hold policy steady.

Both sets of October manufacturing PMI data out of China beat forecasts and this also helped support the aussie since China is a major trading partner of Australia. The final Caixin manufacturing PMI jumped to 51.2, well above the expected 50.2 and higher than the previous month’s 50.1 reading. The official manufacturing PMI reading also surpassed expectations and came in at 51.2 for October. The strong readings suggest the world’s second largest economy has sufficient momentum to see sustained recovery.

The RBA kept the main cash rate unchanged at 1.5%. This was no surprise to the markets but what sent the aussie higher was a more upbeat tone on Australia’s economic outlook.

After a soggy start to the Asian session, the aussie surged to its highest level against the greenback since October 26 at $0.7658.

The Bank of Japan’s two-day meeting came to an end today with a decision to keep policy on hold. This was expected and had little impact on the yen. The short-term interest rate was left at negative 0.10%.  The BOJ said it will keep its yield curve targets steady and its bond buying program at an annual pace of 80 trillion yen but it cut inflation forecasts and warned of risks to the economy. In a press conference following the announcement, BOJ Governor Haruhiko Kuroda said that there is enough momentum to meet the Bank’s 2% inflation target.

The dollar saw some slight gains after the BOJ decision and hit a session high of 104.96 yen following a session low of 104.65 yen. Prior to the policy announcement, Japan’s manufacturing PMI for October came in at 51.4, below the prior 51.7 reading.

Sterling consolidated gains made yesterday after Bank of England Governor Mark Carney said he’ll extend his time in office by a year to 2019. The pound jumped to a high of $1.2248 against the dollar as markets liked the idea of the Governor staying on through the Brexit process.  The Bank of England holds a policy meeting on Thursday.

Looking ahead, markets await the Federal Reserve policy meeting that takes place today and tomorrow so there could be some positioning ahead of this risk event. Gold prices could be affected as the precious metal is sensitive to interest rates. While there is no expectation for a rate hike at this FOMC meeting due to the upcoming US elections, there is growing speculation that the Fed could make a move to hike rates in December.

Manufacturing PMI data out of the UK and the US later in the day will also be closely watched.