Following on from the tail end of U.S trade, the Aussie has eased lower in early Asia, coinciding with a soft opening from regional equity markets. The key inflection point set in the ensuing period of yesterdays RBA minutes appears to be all but faded, with softer U.S equity performance in the latter part of U.S trade prompting moderate losses. The local unit has maintained a downward trajectory against the Euro which continues to reap the rewards of squaring of short positioning. This short squeeze saw the Euro rise to 7-week highs of 1.2490 and remains well supported around current levels of 1.2470, while also posting solid gains against the recently in-form Canadian dollar. Rumor and innuendo continue to drive currencies with investors focusing on possible ECB initiatives in the pipeline to bring down the borrowing costs across Europe’s periphery. A well attended Spanish debt auction gave the Euro further impetus to build on earlier gains, with the upside momentum forcing a further squeeze of short-side positioning, exacerbated by light liquidity.
The Australian dollar enjoyed solid support in the ensuing period of RBA monetary policy minutes and into early European trade with price action breaking the 105 US cent region. The release of the minutes set a key inflection point for the local unit but the momentum faded coinciding with a reversal from U.S equities which provided some headwinds. As often the case, it was perhaps what was absent from the minutes which gave the local unit a burst of energy. Apart from a brief mention, the minutes failed to elaborate on the fundamental divergence between dollar demand and a decline in commodity prices, and more importantly if this divergence is classified as market dysfunction worthy of direct intervention. Markets have been well informed (courtesy of the recent Statement on Monetary Policy) of the “important risks” a high exchange rate may have on domestic conditions which softened the impact. Nevertheless, while acknowledging the risks to the domestic economy emanating from the Euro region and deterioration in the global growth prospects, the minutes were far from gloomy. The minutes noted tentative signs Chinese growth is “stabilising at a more sustainable pace,” while recent interest rate reductions were beginning to infiltrate domestic conditions, in particular the housing market.
While regional equity movements may provide the direction in domestic trade, the next top-tier event will be this evening’s release of the FOMC meeting from the August 1st meeting, which is sure to attract the usual level of stimulus related conjecture ahead of the Jackson Hole summit on August 31. Nevertheless, market expectations surrounding the near chances of further stimulus are largely divided, with a recent string of mixed indicators doing little to tip expectations one way or the other. It’s clear there’s a confusing set of directives to guide expectations and FOMC members have done little to clear the air. Overnight Atlanta Fed President Dennis Lockhart summed it by saying “monetary policy can exert a powerful positive influence on an economy,” it “is not a panacea.”
