Market Drivers for March 26 2014

Aussie takes out 9200 as Stevens fails to jawbone aggressively

BoE’s Weale – rates wont stay at 0.5% indefinitely

Nikkei .37% Europe 1.43%

Oil $99/bbl

Gold $1315/oz.

Europe and Asia:

EUR GFK Consumer Sentiment 8.5 vs. 8.5

CHF Consumption Indicator 1.57 vs. 1.49

North America:

USD Durable Goods 8:30 AM
USD Flash PMI 9:45 AM

The Aussie and pound set fresh weekly highs while the rest of G-10 FX languished on a quiet night of trade in the currency market driven mainly by policymaker rhetoric. In Australia the central bank governor Glenn Stevens was generally contained in his remarks at a conference in Hong Kong, refusing to aggressively jawbone the currency and Aussie responded by breaking out above the key 9200 figure.

Mr, Stevens reiterated the point that he expects an extended period of stability for interest rates, reaffirming the fact that the RBA’s rate cutting cycle is over. He noted that he does not see any serious risks of inflation but did offer some concern over rising asset prices – a dynamic that is likely to tilt RBA more to the hawkish side as the year progresses. Lastly, Mr. Stevens stated that he sees some encouraging signs that the Australian economy is making a transition from mining led growth to a more balanced approach.

Mr. Stevens did attempt some gentle guidance to take the AUD/USD lower, noting that he expects a decline in terms of trade and that it would be surprising if AUD did not drop accordingly. However, he also stated that he would be reluctant to draw lines in the sand in the FX markets indicating that the central is not going to get aggressive on the currency at current levels.

It appears that the RBA will tacitly tolerate the current exchange rate as it is not impinging growth for now. However, Australian monetary officials will likely step up their rhetoric should AUD/USD approach the 9500 mark. In the meantime the market remains well bid the unit as the yield on the Aussie remains secure and the pair is once again in demand for the carry trade.

In UK BoE member Martin Weale noted that, “We are starting to see is that wage growth is starting to pick up and that’s very encouraging because there has been a squeeze on wages and for growth to be sustained we do need income and wages to be rising,”adding, ”Obviously, as the economy recovers, the interest rate isn’t going to stay at half a percent indefinitely.” That comment caused a pop in cable taking the pair through the 1.6550 level, but it retraced some of its gains as trading progressed in London.

UK officials are clearly starting to think about tightening policy, but any speculation of possible rate hike this year, may be premature unless UK growth re-accelerates. The country has had one of the strongest rebounds in the G-4 universe, but policymakers remain convinced that there is still significant amount of slack in the economy. Furthermore with inflation below the key 2% level, there is little urgency to hike rates anytime soon and the BoE is likely to wait until it sees material improvement in wage gains before acting on the rate front.

In North America today, another quite calendar day with only Durable Goods and Flash PMI Services on the docket. The markets are looking for a slight bump in the services reading to 54.2 from 53.3 the month prior and if the data meets or beats expectations it should help support USD/JPY and possibly push it above the key 102.50 resistance level while the comm dollar carry trades such as AUD/JPY and NZD/JPY should all continue to do well.

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