RBA’s Interest Rate Dilemma

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Market Drivers November 21, 2017
Aussie rebounds on Lowe’s comments
MPC testimony weighs on cable
Nikkei 0.70% Dax 0.46%
Oil $56/bbl
Gold $1280/oz.

Europe and Asia:
GBP UK PSNB 7.4B vs. 6.6B
GBP CBI 17 vs. 3

North America:
USD Exiting Homes Sales 10:00

It’s been a slow night of churn in the FX market today with no significant newsflow and markedly lower volumes as the holiday week mentality appeared to have already crept into trader’s minds.

The only significant mover was the Aussie which first fell below the .7550 level in early Asia trade after a slightly dovish tone of RBA minutes but then rebounded strongly in morning European dealing on Governor Lowe’s remarks that next move in rates would most likely be up rather than down.

Although the Australian economy is plagued with low wage growth and lackluster consumer demand, the RBA is loathe to lower rates any further for fear of stoking the housing bubble. Australian housing values remain highly elevated and clearly, the central bank does not want to add to the rise in asset prices by easing credit further.

It appears therefore that the RBA will remain resolutely neutral for the foreseeable future which is the reason that currency has seen almost all volatility taken out of it over the past several months. For now, AUDUSD will be driven by US rates, as analysts expect the RBA to remain stationary for all of 2018. The pair remains supported at the key .7500 level, but if US rates move up towards the key 2.50% mark on the benchmark 10-year bond, Aussie will likely break that support fairly quickly.

In North America today the calendar is very quiet with only the Existing Home Sales data on the docket. The market is looking for a rise of 0.7%, but if the data beat to the upside, it may provide the fuel for USDJPY to test the 113.00 level as the day proceeds.

Boris Schlossberg
Managing Director

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