Aussie Tumbles On Intervention Fears As USD/JPY Clears 100.50

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Market Drivers for November 21, 2013
RBA’s Stevens threatens intervention sending Aussie to 9250
EZ PMI data mixed as France contracts but Germany expands
Nikkei 1.92% Europe -.67%
Oil $93/bbl
Gold $1246/oz.

Europe and Asia:
CNY PMI Manufacturing 50.4 vs. 50.8
EUR Flash PMI 50.9 vs. 51.9
GBP PSNB 6.4B vs. 4.8B

North America:
USD PPI 8:30
USD Unemployment claims 8:30
USD PMI 9:00

The Australian dollar continued to weaken in Asian and early European trade after Chinese Manufacturing PMI missed its forecasts and RBA Governor Glenn Stevens suggested that he was open to the idea of intervention to push the currency pair lower.

Speaking at the Australian Business Economists annual dinner Mr. Stevens stated that powerful global forces were keeping AUD/USD high and that the pair was above its longer run equilibrium. Mr. Stevens like all Australian policymakers has been frustrated with the massive scale of monetary easing from G-4 central banks that has produced strong capital flows into AUD/USD which remains one of the few yielding G-20 currencies in the world.

Despite 225 basis points of rate cuts the Aussie still commands a huge interest rate advantage over the dollar, the euro, the yen and the pound. Furthermore, renewed speculation over the prospect of negative deposit rates in Europe has spurred fresh interest in AUD/USD from investors seeking AAA rated yields for their funds. For Australian fiscal and monetary officials seeking to rebalance the country terms of trade, the high level of exchange rate has been a constant source of irritation and Mr. Steven’s comments suggest that the RBA may be entertaining blunter policy measures in order to lower the exchange rate.

For the time being Mr. Steven’s remarks appear to be exploratory in nature as he tempered his rhetoric by noting that intervention could carry significant costs and that he has not yet been convinced that it would be effective. Yet he also stated that it is the long held view of the RBA that intervention can be useful if used judiciously. In short, Mr. Steven’s remarks served to put the currency market on notice that the RBA is serious about using unorthodox means to lower the exchange rate. The Aussie tumbled in response stopping just short of the 9250 level before buyers stepped in.

Elsewhere, USD/JPY finally broke through the 100.50 barrier rising all the way to 100.95 in mid-morning London dealing. The pair was bid from the get go of the start of Asian trade as investors reacted positively to the prospect of possible FED taper in December. With US monetary policy officials moving towards tightening while the BOJ is fully committed to an expansionist policy, USD/JPY may be finally ready to resume its rally and if it can clear the resistance at 101.50 it may target the yearly highs over the next several weeks.

Lastly, the EZ produced highly mixed results with flash PMI data out of France showing further contraction while German PMI readings rose to a 29 month high. The massive imbalance between Germany and the rest of Europe could create very serious tensions with the ECB, especially if Germans resist any further attempts to expand monetary policy. However, with the rest of the EZ teetering on a recession the pressure to stimulate is likely to increase and that in turn could push the EUR/USD towards the recent lows at 1.3300.

Boris Schlossberg
Managing Director

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