With very little in the way of major market moving themes to guide the way, FX risk trends were largely neutral overnight amid extremely light liquidity. Support for the Euro remained in play despite moderate losses across European equities and further criticism from Germany’s central bank over the proposed ECB bond buying operations. There has also been talk the ECB may place limits on peripheral debt yields, which was quickly refuted by the bank. The Aussie dollar maintained a tight 35 pip range against the greenback with price action consolidating around current levels of 104.5 US cents.
Its clear markets are in a holding pattern ahead of significant forthcoming event risk with the Fed’s annual conference in Jackson Hole on August 31 and policy decision in early September. The same level of anticipation exists across the Atlantic with markets awaiting crucial feedback from the European Central Bank in relation to their proposed bond buying operations.
Wednesday’s release of the Fed minutes from the August 1st meeting is sure to attract the usual level of stimulus related conjecture ahead of the Jackson Hole, and a speech by Atlanta Fed President Dennis Lockhart and current FOMC voting member will also be closely watched this evening as markets attempt to gather intelligence on the likelihood of further stimulus. Euro-group President Jean-Claude Juncker will also meet Greek Prime Minister Antonis Samara in Athens this week, amid speculation Greece will seek more time to implement agreed austerity measures as part of their bailout conditions.
The day ahead will see the focus shift to the release of the RBA minutes from August 7 which saw the bank hold the official cash rate steady at 3.5 percent. While acknowledging the significant challenges from the euro region amid a subdued global growth outlook, on balance, the statement painted a fairly positive picture. On China, the statement noted growth has moderated to a more sustainable pace, but “does not appear to be slowing further.” Local inflation is expected to be in line with expectations and business credit has recorded its strongest growth in several years. On the Australian dollar, the bank highlighted the local unit’s resilience despite a marked decline in the terms of trade and weaker global growth outlook. This point was further emphasized in the later release of the RBA Statement on Monetary Policy which also acknowledged the role a strong currency has played in dampening domestic growth and weighing on non-resource industries and employment. In short, the board considers the high exchange rate places “important risks” on the domestic conditions. This represents a change in language from previous RBA commentary, with the emphasis now on the disparity between fundamental drivers and Aussie dollar demand. Any elaboration on this today may serve as a reminder the Reserve Bank has their eye on high exchange rate, in turn reigniting the debate on how the bank will mitigate these “important risks”.