After last’s weeks Fed-induced slide, the US dollar continued to win back ground overnight with commodity bloc currencies leading the decline across the risk spectrum. Liquidity was lighter than usual with investors taking a breather after last week’s pandemonium, amid a drop in participants in light of the Jewish New Year holiday. This week’s US economic docket is also sparse in comparison to previous weeks with a range of mid-tier housing data the primary focus ahead of Thursday’s Philadelphia Fed index. The latest New York Empire Manufacturing index slid to -10.41 in September from a previous -5.85, adding credence to the Fed’s decision last week to unleash new easing initiatives. A steep short-term drop in the price of crude oil provided a positive back drop for the inversely related greenback to build on gains.
The Australian dollar led commodity currencies lower with the AUDUSD pair falling back below the 105-figure after peaking above 106 US cents on Friday. Sterling bucked the trend with cable remaining supported above $US1.62 but stopped short of breaking 4-months highs just above $US1.63. The Euro softened but remained supported above $US1.31 with little in the way of fresh directives to spur a move from its current range.
Despite moderate easing across risk currencies this week, the overall market demeanor remains US dollar-negative, with the latest commitment of traders report shows US dollar positioning turned net short for the first time since August 2011 as of Tuesday last week. A latter week risk-offensive added to the short-side appeal of the U.S dollar which we anticipate will be strongly reflected in next week’s COT report.
If we look past the immediate psychological merits of QE3, there’s a valid case to suggest the greenback may not need to endure an extended period of decline seen after Fed intervention in the past. Overall, recent price action shows the Fed have appeased short-term expectations, however, unlike the Fed’s first two rounds of quantitative easing, we cannot draw any finite conclusions on the total size and duration of QE3, accept the Fed will buy mortgage-backed securities at a rate of $US40 billion per month and will continue to do so “if the outlook for the labor market does not improve substantially, “in the context of price stability.” It is also possible markets have developed immunity to each new round of Fed easing, suggesting the impact will be less of a shock then previously. In addition, should the U.S data pulse take a positive turn, whether you attribute these to QE3 or otherwise, markets may begin to price-out QE3, suggesting the impact will be softer than that of the Fed’s previous stimulus efforts. Nevertheless, it’s a question of timing and it would be a bold move to begin preempting a material shift the upside for the greenback at this very early juncture.
The day ahead will see the RBA policy meeting minutes for the September meeting take centre stage. The committee left interest rates unchanged at 3.5 percent with the ensuing statement taking a tad more of a neutral tone than markets had priced in. The statement acknowledged weakness from recent Chinese indicators, which is a delicate downgrade from the August statement which noted “China’s growth has moderated to a more sustainable pace, but does not appear to be slowing further.” In essence, the statement justified why interest rates are below their medium term averages, rather than building a case for additional cuts to the official cash rate.