Risk appetite was slightly weaker in the Asian session, as equity markets failed to shake off a weak US consumer confidence figure. The USD strengthened as a consequence, with the commodity currencies losing the most ground. We believe the markets are starting to really take notice of the mounting disparity between relative economic performances. The falling momentum can be seen in the recent US economic data (Consumer Confidence reading disappointed at 47.7 versus consensus 53.5) but also UK, Japanese and Eurozone economic data have failed to impress. However, on the other side of the world EM Asia continues to chug along, punctuated by China's recent GDP figures. We believe this deferential will be an increasing part of FX pricing but currently risk appetite reigns supreme. Today, Australian CPI barely beat expectations coming in at +1.0% q/q (cons. 0.9%, prev. 0.5%) and +1.3% y/y (cons. 1.2%, prev. 1.5%). However, with roughly 100bp of tightening already priced for the next three RBA meetings combined with the heavy feel of risk correlated trades, the topside surprise was not enough, and AUD sold off (after a flash move higher). We are in line with market consensus in expecting the RBNZ to hold rates at 2.50%. Officials have been very clear, including Prime Minister Key, that New Zealand is unlikely to face an upwards pressure on the cash rate until mid 2010. In addition, the strong NZD has been putting “enormous pressure” on domestic exporters, increasing the probability that any tightening is a long way off. In Key's own words As long as the exchange rate stays high, it's not likely, I would have thought, that the Reserve Bank alters interest rates. For this meeting, the most we can expect is a slightly shift in tone of the accompanying statement to a more neutral policy stance. CPI rose 1.3% q/q in the September quarter, following increases of Q2 0.6% q/q and Q1 0.3% q/q and following a decrease of 0.5% q/q in December 08. The latest figure outpaces the RBNZ own MPS forecast of 0.9% q/q and reinforces the removal of their easing bias. If the statements take a hawkish tone, this should supportive for the NZD, to the dissatisfaction of central bank members.
The highlight of the trading day just might be the Norges Bank rate decision. Its universally expected that the central bank will follow the RBA 25bp higher to 1.50%. In addition, we expect the Norges Bank to increase GDP and inflation forecasts and rate rates again in December. After the strong run up on the NOK we could see a bit of selling after the news. Another light calendar day includes durable goods orders and new home sales and the next Treasury auction is for the 5y note.