The greenback pressured again by suggestions Gulf states moving away from the dollar for oil deals


MAJOR HEADLINES – PREVIOUS SESSION

  • US Sep. ISM Non-manufacturing out at 50.9 vs. 50.0 expected and 48.4 prior 

  • NZ Q3 NZIER Business Opinion Survey out at 36 vs. -25 prior 

  • AU Aug Trade Balance out at –A$1524 mln vs. –A$900 mln expected and revised –A$1783 mln prior 

  • AU RBA raises rates by 25bp to 3.25%


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • Swiss CPI (0715) 

  • UK Halifax House Prices (0800)

  • UK Industrial Production (0830) 

  • UK Manufacturing Production (0830) 

  • EU ECB’s Ordonez to speak (1000) 

  • CA Building Permits (1230) 

  • US Treasury’s Levey to testify (1330) 

  • CA Ivey PMI (1400)

Market Comments:

A weak session for the greenback against most currencies yesterday as data from the service sectors on both sides of the Atlantic came in better than expected, and either broke into, or pushed higher into expansionary territory. In Europe, services PMI numbers were an above forecast 50.9, the same in the UK with a 55.3 reading but it was the non-manufacturing ISM data from the US which grabbed the attention as it rose to 50.9 from 48.4 previously, the first move above the 50 boom/bust level since August last year.

Equity markets cheered the data, staging the first rally in four sessions, while it was back to the same old story on the currency front, pressuring the dollar when the data supports the recovery story. Before the data took hold we heard more post-G7 currency rhetoric from France’s Lagarde and ECB’s Trichet both advocating a strong dollar, as did US Treasury Secretary Geithner, though the market impact was limited. The same went for mid-morning comments from Japanese finance minister Fujii who mentioned that the weak dollar had been discussed at the G7 meeting.

At the start of the Asian session, all eyes were on the RBA arte decision later in the session when an article in the UK Independent came out of left field and excited markets. The report states that Arab states have launched secret moves with China, Russia, Japan and France to switch from the dollar as the base for oil dealings to a basket of currencies which would include the Yen, Yuan, Euro, gold and a new unified currency planned in the Gulf Cooperation Council. While the timeframe quoted for such a scheme was by 2018, FX markets naturally pressed to pay this forward, especially given the theme of a weaker dollar has been dominant of late. Note we saw a similar reaction when the likes of China, Brazil and India were advocating the creation of a new currency away from the dollar.

Prior to the RBA announcement, markets chose to ignore some weak Australian trade data for August, instead preferring to focus on rate prospects. For the record, the trade deficit was still a wide A$1.524 bln following July’s revised A$1.783 bln with a drop in exports the major contributor (a victim of the firming AUD?).

On to the RBA rate decision. In the end the RBA decided to hike rates by 25bp from 3.0% to 3.25%, citing a global economy that appears to be returning to growth, and will likely to continue to do so into 2010. It acknowledged the high level of the AUD and stated that this had been considered during the rate decision discussions. It noted particularly strong growth from China and expects growth from other trading partners to revert close to trend in 2010.

Despite the market being basically long AUD for a while, the AUDUSD staged a quick 80 point rally after the news, but still failed to break new ground for 2009, stalling at 0.8844 initially, yet the tone of the RBA statement is definitely hawkish, especially given the comment that “inflation will probably not fall as far as earlier thought and eventually we tested new 2009 highs at 0.8875. So, who’s next in the queue to hike? In Asia, hawkish rhetoric of late has been from South Korea and India, but it seems to have been slowing in Europe.

It may be worth noting that in the rush to sell dollars, the GBP has been a notable laggard amongst the majors with the BOE MPC meeting scheduled for Thursday a potential drag. Notwithstanding the RBA rate hike, the BOE appears nowhere near approaching a hiking cycle with economic growth and activity fragile at best. No doubt talk of QE measures and rate reductions on interest paid on bank reserves will do the rounds and keep GBP loitering behind the rest of the major currencies.

The UK is the dominant economy on the data front today, with Halifax house prices and industrial/manufacturing production on tap. Nothing on the US data slate but North America can focus on Canada’s building permits and Ivey PMI.