Dollar Runs Out of Gas

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Market Drivers for November 4 2014

RBA leaves statement unchanged, AUD rallies above 8700
UK PMI Construction slows but remains above 60

Nikkei 2.73% Europe .40%

Oil $77/bbl

Gold $1165/oz.

Europe and Asia:

AUD Retail Sales 1.2% vs. 0.3%

AUD RBA remains unchanged
GBP UK PMI Construction 61.4 vs. 63.5

North America:

USD Trade Balance 08:30

USD Economic Optimism 10:00

USD Factory Order 10:00

The dollar rally ran out of gas in Asian and early European trade tonight with some profit taking kicking in in USD/JPY, AUD/USD and euro while cable remained weak after softer than expected construction PMI data. The buck fell hardest against the yen correcting nearly 100 points from yesterday’s fresh 6 year high of 114.20 after Japan’s Chamber of Commerce head Mimura said that the unit weakened too much.

The move happened despite more than 2% gain in the Nikkei as the pair diverged from equity flows for the first time in many days. The correction however is very natural. With USD/JPY gaining more than 500 points over the past week profit taking in the pair was due and it is very likely to drift lower and test bids at the 113.00 level over the next few days.

Meanwhile the data action in the Asian session was centered in Australia which saw a slew of important reports released earlier today. On the positive side Australian Retail Sales rose by 1.2% versus 0.3% eyed a very sharp increase in consumer demand that was partly caused by the release of the Iphone 6. However, even with skew caused by the new Apple product the data showed a broad improvement in consumer spending and suggests that the Australian economy remains in stable condition.

On a negative note the Australian Bureau of Statistics released its updates to the employment data and revised most of it lower raising the unemployment rate to 6.2% from 6.1% while showing a loss in total employment of -7.5K in three months to September compared to original estimate of +14.3K. Although the jobs revisions were clearly negative they did not show a massive downward adjustment and quelled fears of any further easing by the RBA.

Indeed the RBA statement today indicated that the central bank intends to remain resolutely pat keeping its policy unchanged for the time being. The RBA noted that the prudent course is for period of stability in rates but once again stressed that the Aussie was above the estimates of fundamental value given the fall in commodity prices.

The Aussie rallied in relief and the pair rose to a high of 8748 before finally running out of steam. The AUD/USD remain in a broad 8600-8800 range for the time being as conditions in Asia look relatively stable while its G10 leading yield provides it some support from carry trade flows.

In North America today the calendar is subdued ahead of much more important event risk at the end of the week. For today the focus will be on Factory Orders Trade Balance and Consumer Optimism – none of which are likely to move the market much. With profit taking the theme of the day those flow may persist in North American trade especially if the US data proves to be a disappointment in which case EUR/USD 1.2550 and USD/JPY 113.00 could all be tested.

Boris Schlossberg
Managing Director

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