Last Tuesday the Reserve Bank of Australia (RBA) unexpectedly kept the policy rate unchanged. Markets were expecting a 25bp rate hike given the RBA’s recent hawkishness, so inevitably, the Aussie suffered selling pressure and fell against its major counterparts. RBA maintained that rates were appropriate for the time being, and left the door open for possible future rate hikes in order to ensure that inflation remains within target.
Analysts are now expecting a possible hike to come in November. Apart from the background concerns for global growth, the fact that other major central banks like the US and Japanese, among others, are pointing towards quantitative easing (QE), in contrast with RBA’s ambition to hike rates to keep inflation within target – and further QE is indicative of diminishing growth expectations – might have called for some caution on the part of RBA.
The possibility is that with the Fed leaning towards QE since its last FOMC meeting, the RBA adopted “a less in a hurry” stance which contrasts with what was said over the past month.
Australia is also suffering a chronic housing shortage and increased rates might undermine more home building. Data released around the end of September showed that Australia registered a drop in building approvals. This means that higher interest rates might be one of the factors hurting demand for new homes – so maybe the RBA is trying to strike a balance here.
Even the Japanese yen suffered selling pressure as the BoJ unexpectedly cut the policy rate by replacing the current 0.1 per cent with a range of 0-0.1 per cent, and said it will set up a temporary fund to buy short term JGBs, among others, in an effort to step up monetary easing to curb the yen’s strength.
The euro eased Monday evening on renewed concerns over the financial viability of eurozone banks.
The ECB also announced that €1.344 billion worth of sovereign bond purchases was settled last week under the ECB’s Securities Market Programme. This was reportedly higher than the previous week’s purchase volume and it shows that sovereign bonds yields from the peripheral members would have been significantly higher last week were it not for the ECB’s intervention.
On Tuesday morning Moody’s placed Ireland on review for a possible downgrade. The euro however, managed to bounce off on news of BoJ’s rate cut and easing, rising from the 1.3647 to initially reach 1.3692, and reached highs of 1.3794 throughout the morning.
In a news conference, after talks with Chinese Prime Minister Wen Jibao in Brussels, ECB president Jean Claude Trichet reportedly said Forex flexibility was in China’s interest and that the Central Bank was in close cooperation with the Chinese counterpart. Mr Trichet also welcomed Mr Wen’s offer, made during a visit to Greece, to buy Greek bonds when Greece will need to tap the debt markets again. Following the news conference intervention, rumours also had it that Asian demand and buying from a US bank was helping to boost the European currency.
Later on Tuesday morning better than expected eurozone PMI Composite and PMI Services continued to fuel support for the single currency. However, negative figures for eurozone retail sales, just an hour after the PMIs, eased support for the euro – but the euro still managed to preserve the gains made earlier. The euro has, until now, been able to show resilience to negative data, this short-term bullishness is seen to be the result of the euro being a better option than some of its counterparts – since JPY for example is weighed by further easing and currency intervention, and the USD is weighed by the looming prospects of soon-to-be QE.
Hence despite its own debt troubles the eurozone might emerge, at least for now, as the most viable option from among the troubled currencies.
The prospective US QE seems to have been either priced in at some stage or has been offset by other concerns as the USD enjoyed the comeback of some support and it was gaining ground against a number of its counterparts earlier this week.
The major US equity indices went lower at close on Monday evening; traders were citing profit taking due to the dollar’s rise against its major counterparts. Trader’s comments indicated that the overall market sentiment was moving beyond double-dip fears, despite the market’s lapse last Monday.
Upcoming FX Key events:
Today: Eurozone ECB Interest Rate Decision, UK BoE MPC Meeting & Asset Purchases Target.
Tomorrow: US Non-Farm Payrolls, Private Payrolls & Unemployment Rate, Canadian Net Change in Unemployment
FX Technical Key points:
EUR/USD is bullish, target 1.4200, key reversal point 1.3200.
USD/JPY is bearish, target 80.00, key reversal point 90.00.
GBP/USD is neutral.
USD/CHF is bearish, target 0.9600, key reversal point 1.0600.
AUD/USD is bullish, target 100.00, key reversal point 89.00.
NZD/USD is bullish, target 0.78, key reversal point 0.7000.
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Mr Muscat is senior trader at RTFX Ltd.