A$ near 2-month low; expectations high ahead of ECB unveiling

There’s been a succession of negative themes driving the Australian dollar in recent weeks and little has changed over the last 24-hours. Considered to be another piece of the puzzle to suggest the start of a deeper south-bound correction, yesterday’s release of Q2 Gross Domestic Product come in just shy of estimates. Although healthy, the GDP print is the latest of a growing list of local macro data points suggesting the pace of growth is slowing, amid further signs China’s economy is coming off the boil. Overnight, the Aussie dollar continued to grind lower making a move to the downside of 102 US cents to near 2-month lows against the greenback, while making a deeper correction lower against the Euro and Sterling. It’s clear the local unit remains out-of-favor from a local standpoint, while moderate strength from the greenback overnight reinforced weakness. Also driving the pair is stimulus conjecture ahead of next week’s Fed policy meeting which many consider may see the Fed embark on a third round of quantitative easing. On balance, the data pulse in the U.S has been inconsistent with some bright spots in the economy overshadowed by sub-par growth in manufacturing. The ISM manufacturing released Monday showed the sector remains in contraction with the index falling to 49.6 in August from a previous 49.8. While this may add weight to the QE3 argument, the prices paid component of the index rocketed to 54 from a previous 39.5, suggesting inflationary pressures have once again infiltrated the broader economy given the recent spike in energy and grain prices. This alone may provide another reason for the Federal Reserve to sit on the QE3 sidelines when they meet next week, implying disappointment and a possible shift to the upside for the greenback at the expense of risk currencies such as the Australian dollar.

Nevertheless, local factors are currently playing leading role in the Aussie dollar’s appeal and the day ahead may reinforce recent weakness with local employment data on tap. The Australian economy is expected to have created 5,000 jobs in August, against 14,000 in July with the official unemployment rate expected to edge higher from 5.2 to 5.3 percent. Should we see any significant deviation to the downside of estimates, bids around 101.5 US cents may slow the downside, but ultimately the July lows at 101 US cents may provide the support in domestic trade. At the time of writing the Australian dollar is buying 101.9 US cents.

With only a short period of time until European Central Bank President Mario Draghi takes the stage, markets remained transfixed on possible outcomes overnight in what’s expected to be a key inflection point in the long running European debt crises. According to reports, the European Central Bank will not enter a quantitative easing style intervention, with capital injected into peripheral bond markets to be sterilized, which requires the bank to take the equivalent amount of funds out of the financial system in an effort to avoid stoking inflation.  The prospect of the ECB setting yield caps appears to be off the table, which is considered untenable in the context of the potentially unlimited funds the bank will need to throw at the market to maintain pre-determined yield caps or spreads. Nevertheless, it’s expected the ECB will not place any explicit cap or budget on how debt they could buy. The plan, which is expected to be unveiled at tonight’s policy meeting, has put markets in high expectancy mode, suggesting a strong of disappointment should the plan fail to appease.

These high expectations continue to provide a solid foundation for the Euro, which returned to solid form overnight against major counterparts after an earlier dip. The EURAUD pair continued its unwavering path higher with the pair forging near 10-week highs, and bounced back against the greenback to return above $US1.26 after earlier lows of 1.25-figure.

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1 Response

  1. Luny says:

    Folks, the likelihood of a conuinting US$ slide is low. Once the Fed starts pumping credit-money again, the money will most likely go to propping up the equity and corporate bond markets, as well as monetizing the Treasury market to shore up banks’ balance sheets in the midst of soaring mortgage defaults and severely impaired bank capital. In this situation, there will be little surplus liquidity spilling out into commodities this time around. Money velocity (GDP/M2+) is likely to continue decelerating. At the current rates of growth of M2+ and GDP, velocity will reach 1.0 (M2+ surpassing GDP)and below by the end of this decade, which is DEFLATIONARY. In this env’t, the US$ is likely to STRENGTHEN in terms of commodities and stock and corporate bond prices, which implies CASH is the preferred savings/liquidity vehicle going forward. Be prepared for the “US$-carry trade” hereafter in which the Fed pumps the monetary base at double digits to finance banks’ purchases of Treasuries, increasing the value of US gov’t paper and pushing the 10- and 30-yr. yields below 3%. As net corporate cash flow and profits/GDP peak and collapse from post-WW II record highs, US supranational firms will repatriate hundreds of billions of dollars from Asia, risking Asian Crisis II (as in ’97), which is likely to support the US$ and US Treasuries for the foreseeable future. Everyone is expecting the US$ to sink, which is actually bullish for corporate profits and stocks. This suggests to me that there are far too many US$ bears and gold bulls (and by extension Goldilocks bulls on the economy). I would not be buying gold at these levels (but would buy with both hands below $500), especially in terms of the US$.

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