Better Data Lifts AUD

The US dollar lost ground yesterday against a basket of currencies, including the euro, japanese yen and British pound. The greenback had begun the new week in positive territory. This followed the long US Thanksgiving weekend, the Swiss referendum and news that ratings agency Moody’s had downgraded Japan. The USD/JPY hit a fresh 7-year high, briefly trading above 119.00 at one stage. The overall dollar strength suggested a “flight-to-quality” from investors. After all, crude oil slumped in Asian markets with West Texas Intermediate breaking below $64 in early trade – its lowest level in over 5 years. At the same time precious metals appeared to be in melt-down, which all suggested that something unpleasant was happening in financial markets. However, it emerged that at least some of the sell-off came after a hedge fund had decided to close down an underperforming commodity fund. This triggered some panic amongst investors which snowballed as over-leveraged traders were forced out of long positions. Later on, oil, gold and silver all staged miraculous recoveries as the trading session progressed. As commodities recovered, the US dollar gave back its initial gains. In fact, investors kept the selling pressure on the greenback for most of the trading session.

Manufacturing PMIs from China, Japan, Spain, Italy and the Euro zone all came in below expectations. The UK’s managed to surprise to the upside and the news helped to lift sterling. Later on, the headline US ISM Manufacturing PMI came in higher than anticipated but below the prior month’s reading.

There is a feeling that the greenback is overdue a correction given its strength since this summer. This view is given greater credence by those who believe that the US Federal Reserve will (due to a deteriorating economic outlook, both home and abroad) ultimately row back from raising rates anywhere near the first half of next year. However, Japanese Prime Minister Shinzo Abe (given he holds on to power following this month’s General Election) seems eager to throw the kitchen sink at the economy to attempt a bump-start. His only problem is that his support within the Bank of Japan has dwindled somewhat. At the same time, Mario Draghi’s European Central Bank looks set to take action to fight off deflation (made worse by falling oil prices) – but probably not at this week’s meeting.

Overnight the Reserve Bank of Australia kept the Cash Rate unchanged at 2.5%. Building Approvals came in well above expectations and this has helped to lift the Aussie dollar this morning.

Today’s significant data releases include UK Construction PMI together with US Construction Spending and Total Vehicle Sales. We also have speeches from Fed Chairman Janet Yellen and FOMC-voting member Stanley Fischer.