Australian Dollar Outlook 10/19/2011

There has been more news, headlines and volatility in the markets overnight, after optimism was generated on reports that France and Germany had agreed to boost Europe's rescue fund.

Australia: The Australian Dollar rallied back over USD 1.0300 overnight as US equities moved higher. This followed a report in the Guardian newspaper which said Germany and France had reached an agreement to increase the European rescue fund to two trillion euros ($2.72 trillion) as part of a "comprehensive plan" to resolve the sovereign debt crisis. Whilst this isn't "new news", it seems to have been received well for the moment, and gave the markets something to cheer, while focus turns towards this weekend's EU Summit to see what is actually delivered. In China, yesterday's Q3 GDP, retail sales and investment reports showed the country continues to be strong but moderation is apparent. Chinese Q3 GDP growth rose by 9.1% y/y but this is slightly down from 9.5% y/y growth in Q2. Strong investment and resilient domestic consumption drove growth and most feel China is in the throes of an economic soft-landing for Q4 ~ 9.4% with full-year growth ~ 9.4-9.5%. This most likely will lead to lower Australian export commodity prices, which one would "think" means a capped AUD. At 9.25am AEST today, Reserve Bank of Australia Assistant Governor Guy Debelle is due to address the Annual Finance and Treasury Association Congress in Sydney while Westpac and the Melbourne Institute are due to release their Leading Indexes of Economic Activity. We see the AUD holding its gains on the day.

Majors: The majors were mixed as risk appetite experienced the high's and low's yet again. EURUSD eased after Moody's warned France's AAA rating was under threat. GBPUSD slipped on a high inflation result as their economy continues to concern. Then however, risk appetite found momentum on the Guardian report mentioned above and currencies including the AUD and EUR rallied. Oil rose on stronger US stocks and a brighter outlook for the US economy, gold prices continued to fall as investors fled to the USD on Moody's news. Base metal prices were mostly lower overnight and soft commodity prices were mixed. Tonight there is this month's BoE minutes when they announced more quantitative easing, US CPI and housing starts, more Fed speeches and the Fed's Beige Book of regional US trends released ahead of the 2 November FOMC

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