The AUD backed up higher overnight as the Reserve Bank of Australia statement proved less dovish than the market was expecting coming into the meeting.
It was a bit surprising to see the sharp AUD rally, and the backup in Aussie interest rates a few basis points at the front end of the curve (lowering the odds on future rate cuts) as there is little to go on from this statement and this looks distinctly like a case of the market simply getting short term over-positioned.
The new statement actually removes a reference in the May statement to the “stronger growth in employment”, which looks quite dovish to me. All in all, the outlook that “overall, the economy is likely to be operating with a degree of spare capacity for some time yet” and a very neutral outlook on the next policy move (perhaps the lack of a more explicit easing bias is what is bothering the AUD bears?) is hardly the stuff that will drive a major AUD rally.
NOK is very weak again as Friday’s strong retail sales and unemployment rate numbers were overlooked in favour of yesterday’s weak manufacturing PMI. The EURNOK rally yesterday puts the pair firmly back in the higher zone above the old pivot line near 8.55, with room to move toward the previous 8.93 and possibly much higher if the Norges Bank is sufficiently bearish at its June 18 meeting (high potential for this).
Today is about whether the USD can get anything impressive going ahead of Friday’s pivotal jobs report. Yesterday saw a mixed batch of data – rather disappointing that the Fed-favourite PCE inflation data came in lower than expected for April (with a core reading that was the lowest, year-on-year, since early 2011) after the stronger-than-expected core April CPI reading back on May 22.
But the ISM Manufacturing survey surprised slightly to the upside and alleviated fears from Friday’s horrible Chicago PMI reading. Today offers only factory orders. Tomorrow’s ISM non-manufacturing and Friday’s jobs report are the heavy hitting event risks through the end of this week.
Chart: AUDUSD
AUDUSD backed up sharply as the RBA failed to explicitly pre-announce coming rate cuts. But the statement was quite downbeat, so the upside potential within the range here may be rather limited, particularly if the US data surprises to the upside through the end of this week.
The G-10 rundown
USD: The dollar has pulled off its strongest levels from yesterday and likely won’t make a dramatic statement either way until we get to the other side of Friday’s employment report.
EUR: The euro is actually quite resilient and the moves in euro pairs have been quite muted ahead of tomorrow’s European Central Bank meeting and given the uncertainty on the Greece news flow. Expect a return to the downside eventually, with the risk that a particularly ugly US employment report sets up a “summer doldrums trade” in EURUSD that bores us all to death within the 1.08-1.14 range.
JPY: The yen is trading very weakly as USDJPY actually managed to touch the 125.00 level overnight – the weakness in the JPY is remarkable, given the lack of catalysts and we wonder if the potential for more upside is under appreciated in the event US data comes in particularly strong through the end of the week.
GBP: Cable is not impressing, but it is important for EURGBP to execute a turnaround back lower by the end of the day tomorrow if we are to maintain a bearish outlook there.
CHF: Waiting for Greece news and wondering if the Swiss National Bank is getting restive with EURCHF down here – we’ll know at the June 18 SNB meeting. Asymmetric risk to the downside for CHF in the long run, with intense, if possibly not sustained upside risk if Greece breaks bad in the coming weeks.
AUD: The market may be over-reacting to the upside on AUD after the RBA meeting, as the statement was quite downbeat – but some further room to the upside within the range in AUDUSD before important resistance comes in. Strong US data may quickly see downside pressure reasserting.
CAD: USDCAD choppy in the 1.2500 area as we await the next signals from US data, as well as the Canadian employment report is also up on Friday. Eventually looking for further upside toward 1.2800+, with near term uncertainty.
NZD: Continues to trade on a weak footing as we watch whether 0.7175/0.7200 holds as resistance and the fresh USD rally is felt especially strongly here. AUDNZD is also back on a run higher after retaking the 200-day moving average and may be set for a test above the recent highs, judging from interest rate spread developments.
SEK: Trading on the weak side as EURSEK may look to test upside of the range as it has been wont to due as it pinballs between range highs and lows.
NOK: The krone is trading on a very weak footing and EURNOK breaking into the upper range sets up a possible 8.95/9.00 test in the weeks ahead, particularly if Norges Bank realises its bearish potential at the June 18 Norges Bank meeting.
Economic data highlights
- Japan Apr. Labour Cash Earnings out at +0.9% YoY vs. +0.3% expected
- Australia RBA left Cash Rate Target unchanged at 2.00% as expected
Upcoming economic calendar
- Germany May Unemployment Change/Rate (0855)
- UK Apr. Mortgage Approvals (0830)
- Eurozone May CPI Estimate (0900)
- US Apr. Factory Orders (1400)
- Australia May AiG Performance of Services Index (2330)
- Australia Q1 GDP (0130)
- Japan Markit Services PMI (0135)
- China May HSBC Services PMI (0145)