Talking Points

• US Dollar Soars on Safety Demand as Asian Shares Follow Wall St Lower
• Australian Dollar Slumps on Risk Aversion, RBA Interest Rate Decrease
• UK GDP, PMI Data to Show Weakness, Reinforcing Case for QE Reboot
• ISM Report Key as Markets Gauge Risk Implications of Firming US Data

TheUS Dollar pushed higher for a second day overnight, adding as much as 0.6 percent on average against its leading counterparts, as a slump across Asian stock exchanges drove safe-haven demand for the benchmark currency. The MSCI Asia Pacific regional equity index fell 1.9 percent, following Wall Street lower on news thatGreek Prime Minister George Papandreou will put the newEU debt crisis containment plan announced last week to a national referendum. Worries about Europe’s ability to secure outside funding for its Special-Purpose Vehicle (SPV) meant to amplify the firepower of the EFSF bailout fund also carried over from yesterday when China’s state-run Xinhua news service said the country can’t be the EU’s “savior”.

TheAustralian Dollar bore the brunt of the selloff, with the risk-off mood compounded afterthe Reserve Bank of Australia cut interest rates for the first time since April 2009, bringing borrowing costs to 4.5 percent. RBA Governor Glenn Stevens cited “moderation in the pace of global growth” and “contained inflation” as the driving logic behind abandoning “mildly restrictive” monetary policy in favor of a “more neutral stance”, adding that the bank now believed price growth would remain on-target through 2013. The Aussie slid as much as 1.2 percent on average against the majors.

Looking ahead,UK Gross Domestic Product andManufacturing PMI figures headline the docket in European hours, with both reports expected to point toward deterioration. Output growth is forecast to slow for the second consecutive quarter to an annual pace of 0.4 percent in the three months through September. Meanwhile, expansion in the manufacturing sector is likely to slow in October, albeit while remaining in positive territory. On balance, these reports may not prove dramatically market-moving considering the implications of poor economic performance for monetary policy (and thereby, the currency) have already been validated after theBank of England re-launched its quantitative easing (QE) program last month.

On balance, theUS ISM Manufacturing report ought to prove more telling, with expectations calling for growth in the factory sector to accelerate for the second consecutive month in October. While the release falls broadly in line with cautious improvement in US economic data since the beginning of June, traders will be keen to gauge the market’s response as a barometer for investors’ interpretation of positive growth cues out of the world’s top economy. On one hand, the result can be interpreted as supportive for risky assets in that a stronger US is good news for the global recovery at large. On the other, it can be seen as risk-negative in that it argues against the likelihood of a “QE3” stimulus program from theFederal Reserve ahead of the FOMC policy meeting due later in the week.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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