Talking Points

• Australian Dollar Rallied as RBA Signaled Rate Cuts Unlikely for Now

• Downtick on Eurozone PMI Data May Not Meaningfully Hurt the Euro

• British Pound May Rise as PMI Outcome Boosts BOE Policy Outlook

The Australian Dollar rallied after the RBA opted to keep interest rates unchanged at 2.5 percent, as expected. The catalysts for move higher seemed to emerge from the policy statement accompanying the announcement. RBA Governor Glenn Stevens notably omitted language suggesting the central bank still saw the Aussie as overvalued. He also argued once again that the“full effects of [the easing in monetary policy since late 2011] are still coming through, and will be for a while yet.” As we suggested in our weekly Australian Dollar forecast, this means that while the RBA is in favor of additional accommodation, it believes further support will yet emerge from its prior efforts and doesn’t see a need for new measures. We remain long AUD/USD.

A roundup of Manufacturing PMI data headlines the economic calendar in European trading hours. In the Eurozone, the final revision of September’s reading is expected to confirm flash estimates pointing to a slight slowdown in factory-sector growth. A print in line with expectations (51.1) would fall just a hair below the two-year high (51.4) recorded in August however. Absent a substantial deviation from median forecasts, this seems unlikely to trigger a meaningful re-appraisal of the ECB policy outlook before this week’s interest rate decision. As such, it probably won’t amount to major driver of the Euro.

Meanwhile, the analogous release out of the UK is due to show manufacturing sector activity accelerated for a seventh consecutive month, with the PMI gauge hitting the highest level since February 2011. Investors may interpret such an outcome to mean that robust economic activity will trigger one of the “knockouts” within the BOE policy framework and force the central bank to re-assess its dovish posture sooner than expected. That would bode well for the British Pound and we continue to hold short EUR/GBP.

Later in the day, the spotlight shifts to the US data docket, where the focus will be on ISM Manufacturing report. Economists’ median forecasts call for a bit of deceleration in the pace of sector activity in September. The print comes amid US Dollar selling after Congress failed to reach a budget deal overnight, triggering the first government shutdown in 17 years. Investors appear to be thinking that the sudden retrenchment on the fiscal front may undermine economic growth and delay the Fed’s move to “taper” the size of its QE3 program. Against that backdrop, a soft ISM print stands to reinforce selling pressure on the greenback.