RBA ready to admit the sky is falling Down Under?

GBP moves today
GBP histrionics intraday today as the BoE published the minutes from its September 20 Financial Policy Committee meeting. The pound fared generally worse in the wake of the minutes, as the FPC remains adamant on the need for banks to boost capital reserves and that banks should not draw down their reserves through increased  lending. It also said it was discussing a range of measures on financial stability. Meanwhile, Chancellor Osborne, in an address today said that QE was a matter for the BoE to decide and that he would help the bank keep rates low.

More supportive news for the pound arrived today in the form of a UK Sep. Manufacturing PMI survey that surprised with a move back above the 50 level and the S&P bonds rating agency affirming its AAA rating on the UK with a stable outlook.

RBA Preview
A very heavy schedule for Australia tonight in the Asian session, with the Trade Balance and Building Approvals and Earnings data followed a few hours later by the RBA Cash Target, in which the market will be looking for a tip off on how soon the RBA is set to begin cutting rates. Lately we’ve seen a mushrooming negative noise level on China among analysts and in the news, a galloping CDS price on Chinese sovereign debt, ugly downside in Asian equities (note the sell-off in the Hang Seng of late, which we also note seems to be leading other major indices), not to mention the massive swoon in key commodity prices that Australia’s economy is heavily geared toward, like copper and iron ore, and the Australian housing bubble tipping into full deflation phase soon.

These factors are rapidly adding up to a number of cuts in the pipeline – but when? The 12-month forward projections are pricing in almost 150 bps of easing now, and have been moving in a -115-150 range since early August. But the latest surveys suggest that only a small minority expect the RBA to even make their first cut by the December meeting, though in recent days, that minority is probably rapidly growing. One suspects that Stevens and company might have their time previous time schedule moved forward if they are in touch with industry leaders as one can only hope they are. Look at a handy benchmark like the BHP Billiton stock price, which lost 22% in the month of September in USD terms. We suspect a strong downgrade in the rhetoric.

Chart: EURAUD – the race to the bottom
The two weakest currencies of the last trading days are in a real mud wrestling match. While the situation in Europe looks desire, it appears that the market is already positioned for a semi-Armageddon there, while the situation in Asia has been festering with far less attention. The next wave of risk off, if/when it comes, may see the pair firmly taking out the 1.40 level.



Lots more this week
Ahead of the RBA in Asia, we have the US ISM manufacturing survey, which comes as the US surveys have been rather confusing of late, with the Chicago survey consistently outperforming its other regional peers. Still, the ISM may dip into slightly negative sub-50 territory. Later this week, we have the US ISM Non-manufacturing survey and ADP employment change report on Wednesday and the full employment report on Friday.

Another important point on the calendar today is the US Senate vote on a bill aimed at punishing China for manipulating its currency. Reuters covers the story here. The actual penalties this bill would actually generate are a pittance, but passage would still be a very significant step as a measure of where lawmakers stand on China. A similar bill failed to pass in the Senate last year, though it did pass the House.

Tomorrow marks the beginning of a two-day EcoFin meeting (Euro Zone finance ministers) as the market cynically awaits the next explanation on how the EFSF will be employed once it is fully ratified to save the system. Meanwhile, the Greek budget farce continues to percolate and embarrass in the background – more promises from a country that has serially failed to live up to any of its promises. The Euro has remained nervous today on speculation over unstable banks (particularly Belgium’s Dexia). The idea of nationalization of the bank is in circulation now, but considering the galloping nature of the sovereign debt question in Europe, adding a huge bank to Belgium’s already shaky sovereign balance sheet doesn’t look like a viable option, especially considering Dexia’s balance sheet is far larger than Belgium’s!