Risk FX Bid Ahead of FOMC Minutes

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Market Drivers for August 22nd, 2012
Aussie falls as BHP Billiton earnings decline, worries on GDP growth
Cable takes out 1.5800 on fresh three month highs
Nikkei -0.27% Europe -0.57%
Oil at $96/bbl
Gold at $1644/oz.

Europe and Asia:
AUD Westpac Leading Index 0.5% vs. 0.9%
JPY Merchandise Trade Balance -.33T vs. -.46T

North America:
USD Existing Home Sales 10:00
USD FOMC August Minutes 14:00
CAD Retail Sales 8:30

With the exception of the Aussie dollar risk currencies remained well bid in morning European trade despite a weaker equity market and an absence of any economic news on the calendar. The tone remains constructive as most market players anticipate that EZ officials will commit to some sort of an ECB plan to backstop the periphery credit markets in the region and contain funding costs for those sovereigns. The euro remained near its recent highs trading at 1.2475 but the 1.2500 figure remains a formidable barrier with reportedly more than a billion euros on offer at those levels.

Cable was similarly stronger today rising above the 1.5800 level as it hit 3 month highs. The pair has been trapped in a 1.5400-1.5800 range for the past several months and today’s breakout may be crucial if it holds, as it would signal a possible move to test the key 1.6000 level in the near ter. The strength in sterling has not been backed up by any fundamental data, but the market may be anticipating an improvement in demand and a possible upward revision in Q2 GDP data due this Friday.

The one high beta laggard today was the Aussie which tumbled in the wake of weaker results from BHP Billiton. Although the company beat expectations its profit declined $US17.11bn from the record $US21.7bn posted in 2011 and it stated that there would be no major new projects initiated in 2013 due to commodity market volatility. The minerals business which a critical growth sector for the Australian economy, is being affected not only by the falloff in demand from China, but also by sluggish growth in US and recessionary pressures in Europe. Some analysts believe that Australian terms of trade could decline as much -15% next year as spot metal prices continue to decline. Such a scenario would very likely trigger a recession in the broader Australian economy – something that the market at this point does not expect at all.

Indeed, today’s BHP Billiton results stand in sharp contrast to the relatively sanguine tone of the RBA minutes issued yesterday, and suggests that Australian monetary officials may have to adjust their policy if demand deteriorates further. The Aussie dropped through the 1.0450 level in the news as its hold on the 1.0500 figure proved elusive. However perhaps more interestingly EUR/AUD has climbed to a new 20 day high of 1.1925 as the re-balancing in the pair continues to take place. The cross has been in a massive downtrend this year as the Australian dollar attracted capital both as a risk currency and as a safe haven trade. However, if the bears are correct and recession risk is much greater than the current consensus view then the short covering in the cross will continue with the key 1.2000 level coming into view over the next few days.

In North America today the focus turns to Existing Home Sales and the FOMC minutes due at 1800 GMT. With respect to the Fed, our colleague Kathy Lien wrote, “We believe that the Fed minutes will be as unsatisfying as the last monetary policy meeting, which means that the impact on the U.S. dollar should be minimal. Don’t expect any optimism in the Fed statement because in the run up to the meeting, economic data was weak enough to justify additional action. If anything, the minutes should reflect more concern within the central bank, which could be mildly negative for the U.S. dollar.” If that’s the case EUR/USD could breach the 1.2500 level on speculation of more Fed stimulus in the foreseeable future.

Boris Schlossberg
Managing Director

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