Export data points to strong outlook, RBA holds fire

The Aussie put in a solid performance today boosted by solid third quarter export data this morning. Net exports of GDP rose 1.5% in the third quarter, up from -0.6 in Q2 and higher than the 1.3% estimated. This of course has seen a meaningful change in tomorrow Gross Domestic Product expectations with banks scurrying to revise estimates. More info and analysis on the export data and tomorrows GDP is available at Forexlive.

One of the great benefits of a free floating currency is it relates (in theory) to the economic health of the country it represents. A weaker currency may promote strong export growth and boost domestic production as well as many other benefits such as tourism. But continued and sustained strength is ironically what may become a burden on the economy. Well it’s hardly going to be celebrated by the Reserve Bank. The point is, currency strength – if sustained – will continue to be a problem for Stevens and Co at the RBA, and eventually will need to be countered by further easing and or step up the jawboning from the RBA.  And the cycle continues.

In today’s meeting the Reserve Bank board left interest rates on hold as widely anticipated.  The last part of the statement sums it up nicely, with the bank not committing to a rate cut, but suggesting there’s ample slack in terms of inflation for further easing if required.

“At today’s meeting the Board again judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand. The Board will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

A bit of volatility ensued with the Aussie taking a dip and establishing around current levels of 72.6/7 US cents.

Still, there’s a second part of the equation to the price of the local unit which is arguably a greater influence at present; the performance of its major counterparts.

Specifically looking at the greenback, it’s a huge week with US jobs data on the bill in what could present the final argument in favour of the Fed lifting interest rates…or not. In terms of market reaction it not about the result, it’s about expectations and its clear most are expecting the jobs data to add credence to a December rate hike. If it doesn’t, volatility will ensue and the US dollar will likely suffer the consequences. Before the main event, markets will be watching for other top tier data points with ISM manufacturing (Wednesday), Beige book and ADP employment data (Thursday) and ISM Services on Friday. Perhaps the key determinant for the greenback ahead of Friday’s NFP’s will be two speeches by Fed Chair, Janet Yellen.

A$ rallies on export data