Market Drivers for February 11, 2014
Better Australian data sends Aussie through 9000
All eyes on Janet Yellen
Nikkei 1.77% Europe 0.87%
Oil $100/bbl
Gold $1283/oz.

Europe and Asia:
AUD NAB Business Confidence 8 vs. 6
AUD HPI 3.4% vs. 3.2%
AUD Home Loans -1.9% vs. 0.5%

North America:
USD Janet Yellen testifies 10:00 AM

The Australian dollar jumped higher by nearly a cent in Asian and early European trade today as data from Down Under indicated that business sentiment was improving. Meanwhile the other major currencies remained relatively well bid against the dollar ahead of Janet Yellen’s first testimony in front of Congress as the new chair of the Fed.

In Australia the NAB survey of business confidence rose to 8 from 6 the period prior, increasing for second consecutive month. The NAB noted that, “The improvements over recent months have established a clear upward trend in business activity, suggesting some upside potential to our current growth outlook, although indicators of employment continue to point to a soft labour market.” It further stated that, “ conditions in the manufacturing sector recorded a “surprisingly strong turnaround,” and concluded that, although, “it is probably still too soon to call the end of sub-trend economic growth in Australia based on these outcomes, but a rise in forward orders and capacity utilisation certainly provides some comfort.”

The news sent Aussie higher throughout the Asian and morning European trade as markets started to adjust to what is likely to be a more hawkish stance from the RBA. The Aussie remains one of the more shorted major currencies on the assumption that economic prospects for 2014 are likely to deteriorate. However, the recent string of data suggest that the economic slowdown may be over, although tomorrow’s employment report will be critical to that thesis. If the Australian economy finally shows some gains in employment after two months of losses, the markets are likely to rally the Aussie through the 9100 barrier as short covering will kick in with a vengeance. If on the other hand the data disappoints, today’s rally could quickly evaporate and the pair could drift towards 8800 once again.

In North America all eyes will be on Janet Yellen as the new Fed chair begins her semi annual testimony in front of Congress. As our colleague Kathy Lien noted there are three questions that investors will want answered. Is She Worried About Muted Job Growth? What Will She do with Forward Guidance? Is Taper on a Preset Course?

Our view is that Ms. Yellen will not deviate from the current Fed message of “steady as she goes” taper. Irrespective of the current slowdown in job growth, Ms. Yellen is likely to note that the expansion remains on pace and that the Fed is committed to unwinding QE as the year progresses. Any change in rhetoric could create massive turbulence in the markets and Ms. Yellen is well aware that she needs to establish continuity and confidence in order to effectively set policy in the future. Therefore we expect her to remain on course and defend the efficacy of Fed’s recent actions.

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