The Reserve Bank of Australia (RBA) has not been comfortable with the strength in the AUD and the minutes shows this as the bank complained of the high exchange rate given the decline in commodity prices and forecasts that GDP would be below trend over the coming year or more. There was also doubt on whether the current level of rates were sufficiently low to offset the weakness in the mining sector and more austere fiscal policy. On employment, the minutes forecast that job growth would only be moderate and wages to rise slowly. All in all, this was clearly a dovish statement, and Australia’s 2-year swap rates dove almost 7 basis points on the news, pushing AUD lower across the board.
Chart: AUDUSD
We had a strong close on Thursday of last week that looked promising for momentum building in AUDUSD, but there has been no follow-on move and the dovish RBA minutes are pushing the pair back lower. A failure through 0.9325/000 would more or less neutralise the previous rally attempt and set up further risk that we test the very well-established 0.9200 area. Tomorrow’s federal Open Market Committee meeting (FOMC) is the deciding factor. I’m looking for an eventual sell-off, even if a more dovish than expected FOMC tomorrow triggers another rally and bout of frustration for the bears.
Looking ahead
We’ve got May inflation data from both the UK and the US today, with neither series sufficiently low or high to deserve much attention either way if the miss relative to expectations is modest. It appears GBP bulls are reluctant to extend their lines beyond 1.7000 until they’re sure that the FOMC meeting tomorrow is supportive of their case for taking the pair higher. The same goes for the USD bulls and USDCHF at 0.9000 and EURUSD at 1.3500 – where the hope is that the FOMC bares its long lost hawkish claws. In the case of USDCHF, recall that Thursday we have the quarterly Swiss National Bank Libor-target setting meeting. This one will get far more attention than usual after the European Central Bank moved into negative rate territory, though few believe they will move to negative rates – see Reuters article for more:
NOK traders should be aware that Norges Bank’s Olsen is out speaking today ahead of Thursday’s Norges Bank meeting.
ZEW divergence
The German ZEW survey up later is somewhat more interesting, as we’ve seen six consecutive declines in the expectations portion of the survey while the current situation index has risen in all six of those same months. As worry about the future has increased, sentiment on the present has only improved. It looks like an odd divergence, but is actually very common in the prior series, with expectations leading the current situation number often by 6-9 months or more at major turns. In a more extreme example, the expectations turned lower in February of 2006 while the current situation didn’t start declining (as the global financial crisis started brewing) until August of 2007. In 2009, however, the lag was more like 7-9 months. The Euro could key off this release.
FOMC tomorrow
I covered a few potential scenarios for tomorrow’s FOMC meeting yesterday. Readers can also peek over at Mohamed El-Erian’s assessment of the situation on Business Insider. He is looking for a rather dovish statement, suggesting that any mention of financial stability will not make its way into the statement tomorrow, but could show up in the minutes. He also expects no change to the rate of the taper. If he is right, then the market currently has the assessed the risks wrongly, because mid-2015 Fed futures have been on the move and the US 2-year rates are pushing at the big 0.50 percent area. This is significant enough to mean that a very dovish Fed could really punish the greenback, particularly versus the likes of emerging market currencies and GBP. I’m leaning towards the Fed trying to bare its teeth, if ever so slightly, at this meeting with some hawkish twist, either in the rate of – or guidance on the rate of- the taper or on financial stability risks (merely a mention that the Fed is aware that the potential for such risks exists could have outsized impact) as the run-up in asset prices has been so brutal and persistent since March.
Upcoming Economic Calendar Highlights (all times GMT)
- Switzerland May Producer and Import Prices (0715)
- UK May CPI/RPI (0830)
- UK May PPI (0830)
- Germany Jun. ZEW Survey (0900)
- Norway Norges Bank’s Olsen to Speak (1055)
- US May CPI (1230)
- US May Housing Starts (1230)
- US May Building Permits (1230)
- Japan May Trade Balance (2350)
- Australia May New Motor Vehicle Sales (0130)
- Japan May Nationwide Department Store Sales (0530)