Top Stories

• RBA hikes as expected but falls on more dovish language
• UK Banks problems continues to weigh on pound
• Jaoan on holiday Shanghai rallies, Europe lower on open
• Oil at $77.71/bbl
• Gold higher at $1061/oz

Overnight Eco

• NZD Labor Cost Index 0.4% vs. 0.35 eyed
• NZD ANZ Commodity Prices 4.6% vs. 6.8% last
• AUD RBA Rate Decision +25bp as expected
• GBP Construction PMI 46.2 vs 47.2

Event Risk on Tap

• USD Factory Orders expected at 1.1%
• USD Total Vehicle Sales expected at 9.7M

Price Action

• USD/JPY drifts below 90.00 as risk liquidation takes hold
• AUD/USD loses .9000 despite RBA hike as bank signals possible slowdown of tightening
• GBP/USD punished in concerns over UK banks
• EUR/USD drops through 1.4650 on EUR/JPY and EUR/GBP flows

Risk off in Asian and European trade tonight as both the dollar and the yen strengthened against the high beta currencies with traders cautious ahead of the central bank meetings scheduled over the next several days. In Australia the RBA did hike rates as expected by 25 basis points, but its statement suggested that the central bankers in Canberra may pause in December and Aussie promptly fell on the news giving up the .9000 barrier.

The RBA noted that “the rise in the exchange rate is likely to constrain output in the tradeables sector and dampen price pressures. Nonetheless, growth is likely to be close to trend over the year ahead and inflation close to target. With the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. The adjustments at the October and November meetings will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.”

The cautious tone of the latest communiqué indicated that Australian monetary policy makers are becoming concerned about the strength of the AUD/USD and do not wish to see it move quickly to parity versus the greenback. Although Australian exports have been relatively immune to exchange rate pressures as demand from China for iron and coal has remained robust, the RBA is clearly aware that rapid appreciation of the Aussie could create massive imbalances in capital flows and tonight’s carefully worded release was a sign to the market that it may now stand pat for a while before resuming its tightening program.

Meanwhile cable was hammered by a variety of factors dropping below the 1.6300 level in morning London trade. Amongst the concerns of the market was the nagging problem of UK banks which will now receive $51 Billion in a second round of government bailouts as they try to bolster their capital base. Additionally, the UK Construction PMI report was of no help to pound bulls as it missed expectations printing at 46.2 versus 47.2 forecast. Still, the PMI services report which is due tomorrow and expected to print well above the 50 line should provide some support if or meets or beats the consensus estimate and we see cable holding the 1.6000 level unless the data surprises to the downside. The key driver for pound, however, will be the BoE meeting this Thursday as traders await the decision on any further QE measures.

In North America the calendar is virtually barren with Factory Orders the only report of note. Yesterday’s better than expected ISM Manufacturing results failed to produce a meaningful bounce in the risk trade as markets remain cautious ahead of the US labor data due Friday. Tomorrow’s ISM Services number will be far more important as a gauge of continuing economic recovery and if the employment subcomponent shows a marked improvement, the capital markets could rally on the assumption that labor conditions are finally improving. Lastly, today’s US auto sector sales could be much greater importance than in period’s past as the market gets to see the true demand for automobiles in the absence of government stimulus programs. Last month clearly saw a massive retrace, but if the October numbers stabilize at 9.7M run rate, they would provide yet another indications of uptick in economic activity.

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
USD	15:00	10:00	USD Factory Orders	1.1%	-0.8%
USD			USD Total Vehicle Sales	9.7M	9.2M

About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.