[LFX]

In the absence of strong data or rhetoric this week, the AUD succumbed to the broad-based correction in riskier assets. After last week’s $US0.92 brief resistance level was punched through on Monday, it’s been an orderly downtrend thereafter to sub-$US0.90.

Indeed the last week the AUD lost ground against all the majors, down 3% against the USD; down 4% against the JPY; down 1.1% against the EUR but more or less matched the soggier CAD. Only the NZD put in a weaker performance over the same timeframe.

Not co-incidentally, the data flow this week was either on the soft side (PPI +0.1%/qtr compared with +0.3%/qtr expectations) or didn’t surprise on the upside (core CPI +0.8%/qtr, exactly as expected after rising expectations for a nasty outcome) not supporting the minority camp expecting the RBA to hike by +50bp next week. Indeed, the OIS market has scaled back expectations for next Tuesday’s RBA Board meeting to an exact +25bp (matching the economist consensus forecast) from the peak of nearly +40bp priced after the 16 October RBA Governor “can’t be too timid” speech.

There is no doubt that Australia has a superior economic track record this year, and the RBA will be lifting the cash rate towards neutral over the coming year. These are not conclusions up for debate. Subsequently, the smart money is likely to conclude that current weakness, or levels slightly below spot, is a buying opportunity.

Looking ahead, all eyes on the RBA decision on Tuesday, followed up by the comprehensive Statement on Monetary Policy on Friday 6 November. While +25bp to 3.5% is all-but a done deal on Tuesday, the market will be scrutinizing the communiqué and SMP for clues as to the pace of subsequent tightening. Also critical for monetary policy are the key monthly building blocks of retail sales and building approvals for September, as well as the September trade report. All of these will provide September quarter estimates that are consistent with the national accounts. It must be said that data to date suggest that September quarter GDP will be flat at best, or could even retrace a little as fiscal stimulus is withdrawn and the trade sector detracts from GDP. However, both Treasury and the RBA expect fiscal stimulus to be a drag on the economy over the next twelve months, after doing a sterling job in cushioning the economy is the last twelve months, and does not detract from the need to lift the cash rate above emergency levels.