Market Drivers for November 13 2014

RBA’s Kent hints at intervention sends Aussie on a wild ride
Chinese Industrial Production misses

Nikkei 1.14% Europe .93%

Oil $7/bbl

Gold $1159/oz.

Europe and Asia:

AUD M1 Inflation exp. 4.1%% vs. 3.4%%

CNY IP 7.7% vs. 8.0%

CNY Retail Sales 11.5% vs. 11.6%

North America:

USD Weekly jobless 08:30

The Aussie went on a wild ride in early Asian session trade after RBA Assistant Governor Christopher Kent mentioned the prospect of intervention in a Q&A session after a speech in Sydney. The AUD/USD immediately tumbled more than 60 points as headlines crossed the news wires but the pair quickly stabilized and retraced all of its losses after traders had a chance to fully digest Mr. Kent’s statement.

In a speech addressing Australian business economists, Mr. Kent spent a considerable amount of time explaining why growth remained below trend, attributing the weakness to slowdown in mining, an overvalued currency exchange rate and ongoing fiscal consolidation.

When asked about the prospect of intervention Mr. Kent stated that, “ We haven’t ruled it out. It’s still there as an option if needed.” This was a rather mild repetition of Governor Steven’s position on the issue which essentially reaffirmed the long standing RBA policy on freedom to intervene should the central bank deem it necessary to do so.

One of the key provisions for such a policy move is that the currency must be at either an extreme over or under valuation. Given the fact that the RBA did not intervene at when AUD/USD was 1.0800 it is unlikely that the central bank would step in at .8800. Thus upon further reflection Mr. Kent’s comments were seen as simply another attempt at jawboning by RBA and Aussie quickly regained its footing.

Not even the subpar Chinese data which saw Industrial Production print at 7.7% versus 8.0% eyed and Retail Sales come in at 11.5% vs. 11.6% forecast, could slow down the short covering rally and by early London dealing the pair was trading at .8740 within striking distance of the 8750 level.

One key reason for Aussie‘s relative strength is that the current G-10 policy positions look to be at a standstill. With ECB unwilling to formally authorize dramatic increase in its asset base and with the Fed essentially watching the economic indicators for the next few months before it decides on interest rate policy, there appears to be little event risk to move currency prices until next year. Under these conditions both investors and speculators are flocking to AUD/USD relative yield advantage to pick up some short term returns on the carry trade. That explains the bounceback in the unit tonight as anything short of actual intervention is unlikely to push the pair lower in the near term.

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