IG Markets Forex thoughts

IG Markets Forex thoughts

AUD/USD

It has been fascinating to see how risk currencies such as AUD/USD and EUR/USD have held up so well when European leaders seem to be scrambling to achieve a concrete solution. AUD/USD, whilst off its overnight high of 1.0497, has maintained stability overnight despite equities undergoing strong selling pressure. There was perhaps an element of support from the heightened expectations of QE3, which would explain why USD/JPY made a new all-time low overnight. It’s also possible there remain some traders still hoping for something unexpected from European leaders, given they know they are carrying the weight of the global investment community on their shoulders. Either way, the fact the pair didn’t retrace to the mid-1.03 level has been interesting. The eyes of the world have been transfixed on the Australian Q3 CPI print, given the RBA’s recent statement that ‘an improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary’. Swaps traders had been pricing in an 80% chance that the RBA would cut interest rates on Melbourne Cup Day, with 50 basis points of cuts pencilled in before year-end. Mr Battelino’s speech yesterday suggested the RBA were in no rush to do so, and suggested they would like to see how the Australian economy would respond to the recent financial volatility; today’s number however, has to suggest that the RBA doesn’t have a huge amount of scope to keep rates at these levels. Looking at the trimmed mean CPI print of +0.3% (qoq), this was half of what analysts were looking for, whilst the annualised print has pulled back to the bottom half of their range. Despite the markets pricing in a high probability of cuts next week, AUD/USD still fell from 1.0431 to 1.0380 in a swift move, with the markets now fully expecting the RBA to cut. This is a poor number and really does open the door for rate cuts, but the focus now falls to the RBA statement; with the last statement being neutral, could they now open the door to an easing bias? Economists will also be looking at the RBA’s inflation forecasts, which will be released Friday week; given what we are seeing, a downgrade to forecasts should ensue and should be meaningful. In the short-term, the fate of AUD/USD will be dictated to by risk sentiment; given that interest rate support has somewhat technically diminish, it’s likely that if we see disappointment tonight, the bears will look to punish the AUD more than any other currency. Despite a reasonably robust retail sales report, lower commodity prices, equity and house prices, low confidence and jobs growth, one would think it would be very confusing if they didn’t cut in the short term.

ENDS

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