Brief Summary:
- The AUD seems to have found its footing above USD 0.9000 as the market calms and volatility falls to a two-month low. Repeated comments from the Fed on labour market softness and continued need for monetary stimulus have caused speculators to reduce their bullish USD bets.
- Confidence in the U.K. economy continues to gain strength and will be quantified with their second quarter GDP growth release on Thursday.
A Volatile Morning
- Today at 11:30am, Australian inflation data was released showing inflation picked up slightly in the second quarter of 2013, as expected, to 0.5%. This placed the yearly Consumer Price Index unchanged at 2.2%.
- In its most recent minutes, the RBA cited the inflation target as the most important policy consideration in its concluding paragraph. The exchange rate depreciation near the end of the observed quarter will fuel further inflation in coming months. Given this outlook, we feel the RBA will be cautious in adding any further monetary stimulus straight away. The AUD spiked over 0.9300 on this premise, though the gains were temporary (see right). Most commentators see an August cut as 50/50, with the latest release providing no real tilt in either direction.
- Shortly after, the China HSBC Flash Manufacturing PMI was released, posting a decline to 47.7; an eleven month low. The figure indicates a further slow-down in Chinese manufacturing activity and the AUD reacted negatively scrubbing gains made on the inflation numbers. The China Federation of Logistics and Purchasing will release their manufacturing PMI next Thursday.
Please see below for specific currency commentary.
USD
- Early on Thursday morning, Ben Bernanke, Chairman of the U.S. Federal Reserve, testified before the House of Representatives. After touching 0.9000 against the USD last week, the testimony supported the AUD above 0.9200 and made headway towards 0.9300, as Bernanke reiterated, “With unemployment still high and declining only gradually, and with inflation running below the Committee’s longer-run objective, a highly accommodative monetary policy will remain appropriate for the foreseeable future”.
- Importantly, second quarter U.S. GDP growth will be released next Wednesday with market expectations at 1.3%, down from 1.8% in the previous quarter. It is also Non-Farm Payroll week in the U.S., crucial monthly employment numbers released on Friday that will be closely watched by the market speculating on the timing of quantitative easing tapering by the Fed.
EUR
- Industry PMIs will be released for key European economies tonight. French, German and Euro area measures of manufacturing and service sectors are expected to show contraction bar German services.
- The Consumer Price Index, the main measure of inflation, for the Euro Area will be released next Wednesday.
GBP
- AUDGBP continued to track around 0.6000 this week as confidence in the U.K. economy picks up.
- The U.K. will release its first estimate of second quarter GDP growth on Thursday. Expectations for 0.6% quarterly growth; the most bullish since 2012. The confidence is being driven by strong industry readings, particularly that of the services sector. Retail sales posted continued growth of 0.2% in June after a blockbuster 2.1% in May; another driver of the renewed confidence.