No imminent monetary easing from the RBA should help put a floor beneath the Australian dollar, while this week’s ECB meeting and US data will be crucial for the near-term euro and US dollar outlooks.
It’s been a sleepy and lackluster summer night of trade with high-beta currencies drifting lower in Europe. Equities sold off mildly and economic data suggested surprising deflation in the Eurozone.
With the Reserve Bank of Australia (RBA) rate announcement the only major event risk on the calendar, currencies spent most of the night in relatively tight ranges, and it seems the markets are content to simply bide time ahead of the key economic releases later this week. In Australia, the RBA maintained its dovish bias, stating that, "The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand." This effectively leaves open the prospects for further rate cuts by the RBA.
The Australian monetary authorities also continued to jawbone the Australian dollar (AUD), noting that, "The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy."
The initial news reaction took AUDUSD to a low of .9152 as traders sold the unit in response to RBA's unrelenting dovishness, but the pair quickly found support at those levels and rebounded towards the .9200 figure.
Despite the RBA's decidedly accommodative policy stance, the central bank is unlikely to make a move on the interest rate front anytime soon unless the economic situation down under deteriorates markedly. Therefore, the AUD looks to be sold out at these levels, and if AUDUSD can remain above the recent swing lows at .9100, the pair can stage a short-covering rally towards .9300 as the week progresses.
A Deflation Surprise in the Eurozone
Meanwhile, in Europe, PPI data showed a surprising decline as wholesale costs dropped by -0.3% versus -0.2% expected. This was the third consecutive month of contracting prices, suggesting that demand remains very sluggish. That, in turn, could provide the European Central Bank (ECB) more scope to ease.
European monetary authorities, however, show little inclination towards further easing, with ECB President Mario Draghi emphasizing the limitations of monetary policy in his recent speeches. In this light, Thursday’s ECB meeting could prove a disappointment if the central bank remains passive.
A Lone USD/JPY Catalyst for Today
In North America today, the economic calendar is very quiet with all the key data set to come out during the back half of the week. However, the component that traders may be watching will be the light vehicle announcements that will come out today. If the pace of car sales comes in strong above the 15M annual run rate, currency traders may push USDJPY through the key 100.00 barrier on enthusiasm about the strength of the US recovery.
See also: The Primary Risk Facing USD/JPY
By Boris Schlossberg of BK Asset Management