RBA Makes a Case for Lower Aussie

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Market Drivers December 2, 2014

RBA makes a case for lower dollar
UK PMI Construction misses
Nikkei 0.42% Europe .74%
Oil $69/bbl
Gold $1195/oz.

Europe and Asia:
AUD Building Approvals 11.4% vs. 5.2%
AUD RBA more dovish on Aussie
UK Construction PMI 59.4 vs. 61.1

North America:
No Data

Currencies were generally quiet today trading within narrow ranges as traders squared up ahead of deluge of data later on in the week. The Aussie however was the one notable mover, losing the 8500 figure in mid morning London trade after the RBA made a more forceful case for lower Australian dollar.

The RBA did not change much of it language, maintaining its neutral stance and noting that the prudent course was for stability in interest rate for a considerable period of time. However, RBA Governor Stevens stated that a lower dollar was “likely to be needed” – a turn of phrase that some analysts in the currency market understood as a signal that the central bank may become much more active in guiding the currency lower.

The RBA is clearly concerned about the sharp decline in commodity prices, especially iron ore which represents one out five Australian export dollars to the country. Tonight’s more dovish language may have been a warning to the market that the central bank would be willing to consider further rate cuts despite a relatively buoyant housing market, in order to lower the exchange rate and help the ailing export sector.

The Aussie initially shrugged off the change of tone in the RBA statement, but as the night progressed the currency grew weaker falling to a low of 8458 by mid morning London dealing. The pair remains in long term downtrend and today’s rhetoric from the RBA only adds to its woes as any threat of a potential rate cut would only cause liquidation for the specs. Therefore the data from China will become even more important to the AUD/USD over the intermediate term horizon because if it shows further deterioration the Aussie could tumble to fresh multi year lows before the year end.

Elsewhere the calendar was quiet with nothing on the docket in North America and only a smattering of second tier data in Europe and UK. Cable remained relatively well supported at the 1.5700 level although Construction PMI slightly missed estimates at 59.4 versus 61.1. The pair remains supported ahead of the 1.5500 level while the economic data suggests steady growth but no material change from BoE’s wait and see posture.

The euro too is holding steady around 1.2450 as latest PPI data confirms that disinflationary forces, amplified by the drop in energy prices, continue to grip the region. The market awaits this Thursday’s ECB meeting to see if Mr. Draghi provides any definitive schedule for the start of QE.

USD/JPY meanwhile has managed to shake off yesterday’s volatility from Moody’s sovereign debt downgrade and has climbed back towards the 119.00 figure but with little data until tomorrow its likely to consolidate around these levels for the time being.

Boris Schlossberg
Managing Director

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