Numerous factors combine to send risk currencies lower, but they are not the usual suspects
A complete lack of headlines and data releases during the session and a bank holiday in Japan resulted in sustained consolidation trading, with the few remaining investors preferring to protect profits as opposed to extending risk trades. It is not surprising investors are taking themselves out of the firing line ahead of Fed Chairman Bernanke’s congressional testimony on Tuesday and Wednesday, which has the ability to significantly shift investor sentiment regarding more QE. If QE3 is taken off the table it would likely cause investors to flock away from equities that are being bolstered by hopes of more stimulus and towards USD. Overall, we expect the Fed Chairman to remain fairly allusive on the subject. He may try and delay market expectations until the Fed meets on 13 September (1 August meeting is likely too soon).
Investors also have their ears to the ground for whispers of more policy easing in China. According to certain Chinese newspapers Premier Wen has been fairly vocal about the fact that a growth turnaround in China is not a certainty, yet. He added that the government’s loosening measures are bearing fruit but difficulties remain for the Chinese economy. The market appears to be taking this as a sign the government is going to loosen policy further, which we agree is necessary but possibly not right around the corner.
Beijing has already undertaken numerous measures in an attempt to stimulate domestic demand. The PBOC has cut the reserve requirement ratio 3 times (by 50bps each time) since December 2011 and trimmed interest rates twice, as well as injecting substantial amounts of capital into the money market. Overall, the Chinese government may want to gauge the full effectiveness of these measures before easing again, which we think will involve an arguably more direct and effective method of simulating domestic demand – infrastructure spending.
Despite hopes of more easing in the world’s second largest economy, risk assets slowly drifted lower during the session amidst low levels of volume, which is indicative of consolation trading during times of lacklustre levels of data and/or headlines. Accordingly, AUDUSD pushed towards 1.0200 but fell short around 1.0210 and NZDUSD broke a support line around 0.7950. EURUSD found some momentum on its way to a session high of around 1.2273, but the pair soon succumbed to broad risk selling. Most major equity markets are holding in positive territory, albeit only slightly in some cases – the Nikkei 225 is closed.
Ones to watch: AUDUSD
The aussie regained some ground late last week and is currently looking fairly comfortable above parity. Tomorrow’s meeting minutes from the RBA may help solidify its short-term position above parity if the bank removes the easing bias we have seen in previous statements. However, the near-term path of the pair will also depend on what Bernanke chooses to reveal at his upcoming congressional testimony. If the easing bias is removed by the bank and it appears QE3 is imminent then the pair may push towards a significant resistance level around 1.0500. Yet, this is not our base case. Instead, we think the case for QE3 is weak and the RBA minutes will likely still have some easing bias if conditions offshore deteriorate further, both of which may weigh on the aussie.
AUDUSD – Daily