The Aussie dollar is better bid this morning up 0.4% on this time yesterday at 0.7579. It’s at the upper end of the 50-odd point range of 0.7533/89.
Initially yesterday, the Aussie came under some selling pressure after the release of the minutes from the November RBA board meeting read more dovish than many had expected. The board’s focus on the enduring weakness in wages data and inflation and the way they framed the expectation of an eventual return of inflation into the 2-3% band fairly screamed no rate hikes for some time.
And the Aussie came under a little pressure trading down toward the lows.
That the Aussie actually rallied after RBA Governor Lowe gave essentially the same message was interesting from a behavioural – and perhaps selling fatigue – point of view.
Lowe reiterated in his speech to the ABE last night that, “if inflation stays at a lower level we will not put up interest rates”.
Tick one for the bears.
But when something bearish, or bullish, happens and a market doesn’t react then – as Dennis Gartman would say – we must take notice. For when a market does not react to bearish news then perhaps it is not really a bear market. Or just maybe short-term positioning is a little stretched and fatigue is setting in.
Now, of course, Governor Lowe’s audience wasn’t just the business economists in the room. It wasn’t just forex traders either. Lowe’s audience was the headline writers and journalists in the room who would frame his speech for his true audience – business and consumers in Australia.
RBA positive on growth
So, Lowe was positive on growth and he reiterated the RBA is still looking at solid outcomes for the Australian economy and that he believes that inflation will eventually kick back inside the RBA’s 2-3% range.
That’s why he said, “It is more likely that the next move in interest rates will be up rather than down, but the continuing spare capacity in the economy and the subdued outlook for inflation mean that there is not a strong case for a near-term adjustment”.
Aussie dollar traders focused on the first bit of that sentence it seems – the next move is up.
But it wasn’t just the Aussie which was a little better bid. The Kiwi and the CAD also lifted from recent lows against the USD. Investors sentiment, risk appetite if you will, is an important part of my appraisal process for the Aussie and commodity currencies. So to that end, rising stock markets, iron ore around 2-month highs, and copper rallying supports risk appetite and thus the commodity bloc currencies – which include the real and Mexican peso.
So for today after belting the Aussie for days on end, after talking about its lack of attraction, or its considerable irrelevance for global investors, I can at least say the Aussie has found its footing.
The best read on that is the price action. A break back up and above the high of two days ago at 0.7608, give it a few points and call it 12, opens the chance of a test toward the 0.7655/60 zone where the top of the current downtrend lies.
Looking further out though, as I highlighted earlier today, what are the chances the RBA is actually right about the uptick in consumer spending when it hasn’t been for quite a few years. Something Governor Lowe himself highlighted with a chart last night.
So while traders heard rate hikes, and while buyers stepped back in, the reality is that the real message for Aussie dollar traders from last night’s speech is that the trend in collapsing spreads between Australian and US rates is likely to continue. And it could go deeply negative for a time which will hurt the AUDUSD if history is any guide.
In other forex market developments, it has been an interesting night where the Norwegian and Swedish currencies the big losers while the Korean won and Mexican peso were the big winners. NAFTA discussions helped the peso, the Won just keeps marching on with USDKRW now sitting at 1,089 this morning while the Scandi’s benefitted after the Swedish central bank did a little bit of verbal intervention.
Yen and Euro
In the bigger pairs it’s been a lot less interesting with the Yen catching a little bid after the big reversal in USDJPY the previous day. At 112.45 USDJPY is down around 0.2%. Euro has had a very quiet day after Monday’s wild ride as traders appear to become more comfortable with the political impasse in Germany. Rather I’d say the story of the last year or so is that any initial reaction to risk has been swiftly reversed. Euro traders are simply following that playbook. Overall though after last week’s abortive reversal off 1.1860 – even before the weekend’s breakdown in coalition negotiations – suggests Euro is in a 1.1550/1.1860 range for the moment.
Looking at the Kiwi it could be that this 68-cent region is once again proving to be a level at which traders and investors are happy to pick up New Zealand dollars. While when I look at USDCAD it’s clear this uptrend line is still a primary input into traders’ decision-making process. A break could usher in a big move for USDCAD. That said here’s the NZDUSD chart. If it can climb back to and break 0.6900/20 the chance this is a sustainable medium-term low would grow. But the trend is still strong for the moment.
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