IB FX View

Aussie dollar setback as RBA relaxes

Tuesday September 1, 2009

The Australian dollar was apparently braced for a yield boost ahead of the Reserve Bank of Australia’s monthly monetary meeting today. Investors have been gearing up for an official rate hike by lifting the yield curve to reflect anticipated increases in the official RBA stance based upon evidence of domestic strength shielding the nation from the global downturn. Additional comments from the top monetary officials have also conspired to set a firm tone for the Aussie dollar. Today’s meeting slapped those bulls across the jowls and sent the currency scurrying down to 83.35 U.S. cents.


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The disappointment after the RBA stated that monetary policy was set appropriately for now sent bond prices up and the local dollar down. It appears that the RBA rationale perhaps senses that those chasing a higher Aussie dollar have put the cart before the horse. The story has shifted today away from the signs of economic recovery to the remedial measures necessary to mend the balance sheets of financial institutions. Without less stress on the Australian financial systems balance sheet, the recovery will not be prolonged nor can it take hold seemed to be the message from the RBA’s statement today.

The announcement helped lift sentiment in the interest rate markets. Although the official cash rate in Australia stands at 3%, futures markets have priced in a rise to 4.1% ahead of today’s meeting. Rates eased immediately after today’s news sending yields down to 3.85%. There’s still a reasonable amount of monetary tightening priced in for year end, but the market will probably need to hear more dovish tones from the RBA to reduce cash markets further.

That news today clashed with the onset of August readings around the world for PMI surveys. The official Chinese version continued to show manufacturing strength and in August the pace ran at the fastest since April 2008. At a reading of 54 the PMI remains above the contraction-expansion divide of 50 and improves upon the July reading of 53.3.

The U.K. CIPS PMI shocked the crowd in London as July’s 50.2 reading appeared to mark the high tide for growth this year. The latest August reading suffered a setback and fell back into contractionary mode as it read 49.7. The pound fell against both the euro to 88.20 pence and against the dollar to $1.6236.

The fiscal largesse of the British authorities seems to be palatable only when the evidence points to contraction. That’s the message we can glean from the earlier rally above $1.70 for sterling versus the dollar. But a pound without growth is cause for concern. For now, the pound appears to be finding ascending support as investors buy the dip, but if last week’s low towards $1.6155 gives way,  we’d simply say, watch out below. Investors today had to weigh up an increase in monthly net new mortgage lending according to Bank of England data, while at the same time it was evident that consumers were repaying debt as the deleveraging process continues.

The Japanese yen reserved its strength for the euro today and rose for a sixth day straight. The euro eased to buy ¥133.62 while the U.S. dollar recovered to ¥93.40 after the U.S. ISM Survey rose by more than expected to 52.9 after July’s 48.9.

Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       

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