ECB Rate Decision: What to Expect (page 2 of 2)

Typically they do not release a statement when rates are not altered, but last month they took the unusual step of doing so. Aside from that time, a statement was only released on two other occasions since the BoE became independent 10 years ago. This was in 1999 and 1998 and on both occasions, interest rates were cut the following month. Therefore even though no one is talking about it, there is a strong chance that the BoE could surprise with an interest rate cut. Even if they don't, they may release another statement because not doing so would risk sending a hawkish message to the market. As recently as yesterday, the BoE has taken measures to increase its flexibility in the transactions that it conducts with commercial banks which is a signal that credit conditions remains a concern for the central bank.

Reserve Bank of Australia Leaves Rates Unchanged

As expected the Reserve Bank of Australia left interest rates unchanged today at 6.50 percent. The Australian dollar did rally on the back of the release but that was primarily due to much stronger than expected retail sales in August. Gains were not sustained however as the market later learned that the trade deficit widened more than expected. According to Treasurer Costello, inflation is contained. Even though the Australian economy is still doing far better than the US and Europe, the strength of the Aussie is beginning to have an impact. Service sector PMI is due for release tomorrow. The Canadian dollar could also see a lot of action with building permits and IVEY PMI due for release. Both are expected to improve, but what we will be looking at the employment component of the report most closely because it can be used as a leading indicator for Canadian employment.

USD/JPY Breaks Out on Payroll Expectations

Led by a major breakout in USD/JPY, all of the Japanese Yen crosses are higher today despite the drop in the Dow. The divergent behavior between the stock and FX markets indicates that both equity and currency traders are only beginning to price in stronger US non-farm payrolls data. If we see payrolls in excess of 100k, traders will question whether the Fed will lower interest rates at the end of the month. If they don't that would be perceived as negative for the stock market and positive for the US dollar.