Dovish RBA minutes

The RBA released its monetary policy minutes of its September Board meeting today at 01:30 GMT. The most important feature of the minutes was the fact that the central bankers were strongly dovish, reusing statements from their June meeting such as the fact that “the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth”. The minutes also showed that the Board considered the AUD to be expensive in spite of a fall in commodity prices. Another topic mentioned in the report was corporate and more specifically mining firms’ capital expenditure assessment. The minutes said that there has been “ a more recent reassessment by some resource companies of the prospects of projects to which they had not yet committed”. The RBA focuses on mining capex because of the major part that mining commodities play in the Australian economy. The central bank seems to believe that capex will increase in the upcoming year due to the large LNG and other pending mining investment projects, but that the sustainability of this capex growth is not guaranteed. After having dipped back below parity against the USD in May, the AUD made a spectacular recovery rising back 10.88% from this year’s low. The pair remains safe within the 30-70 RSI band indicating that there is still room for some upside if risk sentiment picks up substantially. We suspect that the central bank’s dovish tone could give way to further cuts in the Bank’s cash rate which is the highest today amongst its G10 peers at 3.50%. In Europe, Spanish bonds rose back above 6% for the first time since September 7th as investors begin to worry about Spain not asking for aid. ECB’s Coene said yesterday that if markets realize that Spain will not be asking for aid, “spreads will rise again, and then Spain will be somewhat forced to come back on its decision and submit to the conditionality program”. Today, a 12-month Spanish Letras auction went relatively well, with yields dropping to 2.835% from last month’s 3.070% over future expectation of intervention from the part of the ECB on the short-end of the curve (1- to 3-year). Also ZEW economic sentiment for Germany and the Eurozone in general both came in better than expected. Today we eye the Treasury International Capital (TIC) net long-term transactions in the US at 13:00 GMT which measures the difference in value between foreign long-term securities purchased by US citizens and US equivalent securities purchased by foreign investors. We align to market consensus in anticipating a 45.3BN reading, higher than the prior 9.3BN. Any higher than expected reading is considered to be positive for the USD.