RBA Slated to Cut, US Manufacturing Stalls

The ISM manufacturing index fell to a 3-year low on Monday as Fed members prepared the market for further easing. The euro was the top performer while the Australian dollar lagged. The AUD weakness comes with the market growing increasingly confident the RBA will lower rates at todays meeting. A new edition of the Premium Insights is due at approximately 18:30 EST, 23:30 GMT. All 2 EURUSD and all 3 EURJPY from the prior edition hit all targets, in addition to GBPUSD. See below on how to join.

The ISM manufacturing index fell into contractionary territory at 49.5 compared to 51.3 expected. It was the lowest reading since July 2009. Recent manufacturing data has been inconsistent so it may be premature to draw conclusions but the forward-looking new orders component also fell sharply to 50.3 from 54.2. Survey officials said Hurricane Sandy was a minimal factor, if anything.

Comments from the Feds Dudley, Bullard and Rosengren all suggested the Fed will add to its Treasury purchase program at the FOMC meeting next week. Rosengren indicated as much as $45B/month in additional Treasury and MBS buys while Bullard suggested closer to $25B/month.

The euro spiked in early US trading on a pair of headlines. 1) Credit Suisse told clients it would begin charging negative interest rates on CHF deposits, a move that was later followed by UBS. The euro quickly rallied 40 pips against the franc. 2) Headlines that Spain made a formal request for bank aid were misinterpreted as an ESM request.

EURUSD climbed as high as 1.3076 but sank back to 1.3050.

The market now turns to the RBA decision at 330 GMT. There has been a strong shift in sentiment toward a 25 bps cut with the OIS market pricing a 92% chance. Economists are less decisive with 9 of 28 in the Bloomberg survey calling for a hold at 3.25%.

Given the overwhelming implied probability, AUD traders may see better value in longs.

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-AB