IG Markets Forex Thoughts

IG Markets Forex Thoughts

AUD/USD

AUD/USD is showing real resilience at present, and having had every opportunity to push back to parity given the clear slowdown in global growth, it sits delicately poised to break 1.03. We will wait to see if it can hold and close the 200-day moving average at 1.0278, with the 61.8% retracement of the year high to low being the next key target at 1.0369. The eyes of the world fall on Ben Bernanke in US trade and there are some who are desperately hoping he will signal a fresh round of asset purchases, only heightened by the weakness in US retail sales. We sit firmly in the cautious camp here, and while we feel the Fed Chairman will be careful not to upset the market too much, the best we are likely to hear is that the Fed stands ready to do more, as and when. The bar is set high given the recent consumer credit print, pullback in fuel prices and firmer housing market, and we feel Dr Bernanke would want to see a deteriorating inflation picture before committing to more stimulus. If you look at the current inflation expectations as measured by the bond market (i.e. the breakeven rate measuring the difference between US five-year bonds and five- year TIPS) over the next five years, we should see 1.79%, which in fairness is below its 2% target, however it’s still 68 basis points (bp) above the expectations when QE2 was initiated. The RBA minutes released today seem to be more hawkish than the market was positioned for, with the minutes once again highlighting that rates are appropriate for now and gave no indication that it will look to cut a further 25 bp off the cash rate in August, at odds with the 60% probability the OIS swaps market was pricing in and 45% of the 24 economists surveyed by Bloomberg. We will keep an eye on the Shanghai Composite for short-term inspiration, plus talk of a fiscal boost to railway infrastructure projects is supporting that market. German ZEW confidence numbers released in early European trade may give the Aussie a boost if the print doesn’t fall out of bed as expected. All-in-all the resilience of the local unit still surprises us and continues to be a painful short for the global growth bears who for so long have seen the AUD as a poster-child of global growth. Clearly it has diverged from this mantra in recent times, and behind the USD and JPY it would be seen as the back-up safe haven given the underlying themes in the bond market.

Kind regards,
Chris Weston
Institutional Dealing
IG Markets
www.igmarkets.com.au

ENDS

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