The Australian dollar is comfortably back above 76 cents this morning after the US dollar’s rally stalled on the back of weaker than expected data (in the US) over the weekend.
“While the greenback is stalled, the Aussie is enjoying some support from stronger data flow,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
“Despite all the domestic consumption based headwinds, Australian data continues to print above consensus and forecaster expectations,” McKenna added.
He added that if tomorrow’s RBA minutes are likely to be upbeat that may help Aussie dollar gain more support.
However, we’re heading into a bit of a data drought as usual for the back end of the month, so it’s the US dollar and the technical outlook which is the key in the days ahead, according to McKenna.
In the meantime, it’s all about the data for the US dollar and its recent weakness.
McKenna pointed out that despite the US Fed’s hawkish tone last week, the latest US economic data have been relatively awful.
Markets not buying US Fed’s assertions
“Markets simply don’t buy the Fed’s assertions about the outlook for the US economy, its growth rate or inflation,” McKenna said.
Take the relationship between the US dollar index and the Citibank Economic Surprise index for the US which collapsed to -78.6 at the end of last week. That’s its weakest outcome since Jul 2011, McKenna pointed out.
“And it is a handbrake on the US dollars recovery – a big one,” he said.
McKenna explained that the market’s lack of belief in the Fed’s message on the economy is probably best exemplified in recent movements of the 10-year bond and the flattening of the US 10-year bond spread.
He said at 2.157% the 10-year bond is close to the post-election lows and at the same time the bond spread has flattened to just 80 points.
The USDJPY pair had been higher Friday after the Bank of Japan (BoJ) signalled it is keeping its foot on the monetary accommodation pedal even though the economy looks like it is picking up
“I think Japan’s inflation will pick up and so I was taken by the BOJ’s comment that amid these assertions “inflation expectations have remained in a weakening phase”.
According to McKenna, central bankers have an interesting but difficult task in the current global environment.
“They need to be positive and upbeat about the outlook for the economy and inflation but the risks of a misstep by the market pre-empting policy tightening are real, which means they have to send signals they are not moving anytime soon,” McKenna said.
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