Buck Gets Its Bid Back

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Market Drivers for October 7 2014

RBA Leaves rates unchanged

Dollar correction continues but euro weak

Nikkei -0.67% Europe -0.81%

Oil $89/bbl

Gold $1209/oz.

Europe and Asia:

AUD AIG Construction 59.1 vs. 55.0
AUD RBA Rates unchanged
EUR German IP -4.0% vs. -1.4%

GBP UK 0.1% vs. 0.2%

North America:

CAD Building Permits 08:30

USD Economic Optimism 10:00

The dollar was mildly bid against the euro and cable but fell against the Aussie and the yen in generally quiet Asian and European session today. In Australia the RBA left its benchmark rate unchanged and reiterated most of its points noting that the currency remains high by historical standards and inflation is expected to be consistent with target.

The central bank stated that most data is consistent with moderate growth in the economy and reaffirmed that its prudent to have a period of stability in rates. The release initially pushed Aussie lower, but the pair then put in a slow and steady climb to session highs as it took out the 8800 barrier my early morning London trade.

After a near 5% decline since the last RBA meeting the Aussie appears to have stabilized as it found bids from yield hungry bargain hunters over the past week. The net takeaway from today’s RBA statement is that the central bank is likely to remain resolutely neutral for the foreseeable future and that should keep the currency relatively well bid as its yield remains the highest in the G-20 universe.

Meanwhile both euro and cable slipped in today’s trading session giving up about half the gains from yesterday’s short covering rally. The eco data continues to disappoint with the latest blow coming from German Industrial Production data which fell by -4.0% versus -1.4% eyed.

The drop in GE IP was the biggest since 2009 and much of it was blamed on seasonal factors including the holiday school schedule. But the results continue to confirm the notion that demand in the EZ is decelerating rapidly and is in danger of tipping the region into a recession if it does not stabilize.

Even in UK where growth has been markedly better the latest Manufacturing and Industrial Production data has been disappointing. The release printed at 0.0% vs. 0.2% eyed as slowdown in car manufacturing for maintenance reasons caused the output to decline.

With little on the North American calendar except Consumer confidence numbers at 1400 GMT, trading may continue to be choppy for the rest of the day. Yesterday’s short squeeze in the EUR/USD and GBP/USD was a natural reaction to a grossly oversold condition, but the broad economic data continues to favor the dollar and the buck may resume its rally after a few more days of consolidation.

Boris Schlossberg
Managing Director

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