Brief Summary:

  • The AUD stood out as the only bright spark in markets that continued to fret over the possible military action against Syria. The AUD made steady gains against all major currencies this week as domestic data surprised to the upside. The Reserve Bank of Australia kept rates on hold and second quarter GDP growth was relatively robust at 0.6% quarter on quarter.
  • U.S. manufacturing data posted an unexpected improvement and U.S. GDP growth was revised upward increasing the chances of a reduction in Fed asset purchases at its September meeting.
  • Industry surveys in the U.K. continue to climb past three year highs indicating the strongest and most prolonged growth since the global financial crisis and subsequent recessions. 

GDP Growth Holds Steady

Yesterday, the Reserve Bank of Australia held the cash rate at 2.50% as expected by the market. The brief statement had a neutral tone, offering no case for further rate cuts in the near term. The AUD spiked on the release and climbed further in European and North American sessions.

The focus of all the excitement was the omission of this sentence, “the inflation outlook could provide some scope to ease policy further, should that be required to support demand”. However, the board did state it sees inflation remaining contained for the next couple of years even after the currency devaluation. Notwithstanding, the next inflation reading on the 23rd of October will continue to be the most important decider of their next move. We think, even with the above sentence removed, the board will still ease rates in November or December if inflation allows as it has previously.

Today at 11:30am, Australian GDP figures were released showing the economy continued to grow at 0.6% in the second quarter, albeit slightly below trend. The AUD climbed against all major currencies as the number beat expectations of 0.4%.

Australia’s Trade Balance will be released tomorrow morning at 11:30am.

 

USD

 

4-9-13aIt is Non-Farm Payrolls week in the U.S.; monthly employment data is released on the first Friday of each month. This figure has been hailed as the most important determinant of the September Taper, the expected first reduction of assets purchases (quantitative easing) by the U.S. Federal Open Market Committee (FOMC). The week in U.S. economic data has been robust, boosting risk sentiment. Last Thursday, the second estimate of U.S. second quarter GDP growth was revised up to 2.5%. Overnight, the U.S. Institute of Supply Management released its Manufacturing PMI figure, a measure of industry activity and conditions. The figure beat expectations at 55.7 and boosted the AUD. This manufacturing figure was coupled with the Chinese Manufacturing PMI that beat expectations over the weekend at 50.1. The U.S. Non-Manufacturing figure will be released on Thursday night and give some forward guidance for the employment numbers on Friday.

The break from the trend of positive U.S. data being AUD negative suggests a couple of things. After a rough couples of months, the AUD seems to be the only bright spark amongst risk aversion prompted by the conflict in Syria. Secondly, the chances of a September Taper seem more and more likely. As the tapering timeline becomes clearer, the market pricing of these future events will become more accurate and less volatile; lower volatility is generally beneficial for the AUD. In the medium term, as the U.S. recovery gains momentum, the ‘normal’ positive relationship between risk sentiment and the AUD may return.

 

EUR & GBP

The European Central Bank (ECB) and Bank of England (BoE) will meet on Thursday night for their monthly monetary policy meetings; no change in policy is expected.

With no change expected, Bank of England commentary will be closely monitored by the market. Last month the bank issued a forward guidance for monetary policy stating that the current stance will be held until unemployment dips below 7.0% and so long as medium term inflation is not forecast to be more than 2.5%; it is currently 7.8% and CPI inflation is currently at 2.8%.

Recent data has suggested that the U.K.’s recovery is gaining momentum and that the target level of employment will be reached faster than expected by the BoE. For the third month in a row industry surveys have climbed to their highest levels in three years. Manufacturing and Construction PMIs again beat expectations with Services to come later tonight.

4-9-13b