FX: Impact of US and CAD Trade, Where RBA wants AUD

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Better than expected U.S. economic data and hawkish comments from Atlanta Fed President Lockhart failed to provide much support to the greenback. The U.S. trade balance reached its best level since October 2009 and yet the dollar barely budged. Investors were not impressed that the trade deficit narrowed 22.4% to -$34.2 billion from -$44.097 billion. The underlying improvements were also ideal with exports rising 2.2% to a record high and imports falling 2.5%. This is a quiet week for U.S. data but investors will continue to look for clues on how soon the Federal Reserve will taper. Unfortunately the outdated trade balance plays only a small role in their decision. Earlier this morning, Fed President Lockhart said 180k to 200k increases in jobs could lead to a reduction in bond purchases and he wouldn’t rule out a tapering move in October. While Lockhart is not a voting member of the FOMC this year, this is the first time that October has been put forth as a viable option. The focus has previously been on the September and December meetings because of Bernanke’s press conference but the central bank could also hold a special press conference after a move in October – an option that shouldn’t be ruled out completely. The more important comments today will be from FOMC voter Evans this afternoon. He is a known dove whose comments will most likely err on the side of caution.

Meanwhile the Canadian and Australian dollars have seen the greatest movements today against the dollar. Like the U.S., Canada enjoyed a sharp improvement in trade during the month of June. The country’s trade deficit narrowed to –CAD 0.47B from a downwardly revised –CAD 0.78B. Exports rose 1.4% while imports increased 0.6%. Like its Southern neighbor, exports reached a record high thanks to increased demand for cars and aircraft. While Canada’s trade balance is slowly crawling back towards a surplus, the fact that the export dependent nation is running a deficit at all means that the economy is still suffering. To the surprise of many traders, the Reserve Bank of Australia’s decision to cut interest rates by 25bp to 2.5% turned out to be positive for the AUD. The neutral tone of the RBA statement and the lack of update on China or their outlook for the mining sector suggest that the central bank is not considering additional rate cuts at this time. However despite a 15% decline in the AUD/USD this year, they still believe that the exchange rate is too high which suggests that they would be more comfortable with the currency at 0.85 to 0.80 cents against the U.S. dollar.

Kathy Lien
Managing Director

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