Central Bank Inertia

A quite Tuesday in the markets following a fast-moving risk-on Monday and a busy rest of the week. Germany is closed for a public holiday. The ISM manufacturing index jumped to the highest since 1988 but it might be a different detail in the report that grabs the Fed's attention. NZD is the day's worst performing currency after a 2% decline in the dairy auction.The RBA reiterated its concerns with Aussie strength to the extent ot reducing all odds of a 2017 hike. Tuesday's Premium GBP trade is now in the green. The chart below is one of the 3 charts backing this trade.

The ISM manufacturing index rose to 60.1 compared to 58.1 in September and that gave a slight lift to the US dollar. What could lend a more-lasting bid is a hawkish tilt from the Fed. What they're watching for is a genuine sign of inflation. An early one came in the prices paid component, which was at 71.5 compared to 63.0 expected. That's a six year high.

The quick take is that hurricanes caused a temporary spike (and the mild USD reaction gives that theory weight) but it's still a move in the direction the FOMC wants to see.

Other positive signs for the dollar were construction spending at +0.5% versus +0.4% prior, a rise in the Atlanta Fed GDP tracker to +2.7% from +2.3% and another record for stock markets.

GBP broadened losses as interest rate hike speculation took a back seat to the feeling of confusion and lack of unified Brexit message from the Party Conference underway this week. Disappointing manufacturing and construction PMIs sped up GBP selling, raising scrutiny over tomorrow's release of the important services ISM and speeches from BoE's Mcafferty and Haldane.

The RBA reinforced its view that a stronger AUD is "weighing on the outlook for output and employment" and is expected to continue to "subdue" price pressures, which means an RBA hike is unlikely in the next 3 months. Meanwhile the RBA made a rate cut non-viable as it would further fuel household debt relative to income.