The Australian Dollar surged after the central bank unexpectedly raised interest rates to 3.25% and promised further rate hikes going forward. The US Dollar fell against most major currencies on rumors that the Gulf States were leading talks about replacing the greenback as denomination for oil prices with a basket of top currencies.
Key Overnight Developments
• Aussie Dollar Soars as RBA Raises Interest Rates, Says More Hikes Ahead
• Australia’s Trade Deficit Narrows as Oil Imports Plunge, Outpacing Export Drop
• USD Drops on Rumors Gulf States Leading Plans to Change Oil Price Denomination
Critical Levels
The Euro pushed higher in overnight trading, retaking the 1.47 figure and adding as much as 0.5% against the US Dollar. The British Pound followed suit, adding as much as 0.4% against the greenback. We remain short GBPUSD at 1.6617 and EURUSD at 1.4710.
Asia Session Highlights
The Reserve Bank of Australia unexpectedly raised interest rates to by 25 basis points to 3.25%, sending the Aussie dollar broadly higher against most of its major counterparts. RBA Governor Glenn Stevens said interest rates were dropped to a very low level in late 2008 and early 2009 on expectation of “very weak economic conditions and a recognition that considerable downside risks existed,” adding that “the basis for such low interest rate settings has now passed.” Stevens acknowledged that some areas of demand may stumble as government stimulus runs its course, but seemed broadly optimistic that “growth [is] likely to be close to trend over the year ahead [and] inflation close to target,” adding that “the risk of serious economic contraction in Australia [has] passed.” Stevens seemed particularly confident about the prospects for external demand, saying the “prospects for Australia’s Asian trading partners appear to be noticeably better” with growth rates close to long-term trend levels in 2010. Most critically, Stevens said that “it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” suggesting more rate hikes are on tap in the months ahead. Trading in overnight index swaps suggests traders are pricing the likelihood that the RBA will raise rates by 175-200 basis points over the next 12 months.
The central bank’s decision was announced against a seemingly unsupportive backdrop, as Australia’s Trade Balance deficit narrowed to –A$1.5 billion in August from a revised –A$1.8 billion in the previous month as imports fell -2.9%, led lower by a 24% drop in inbound fuel and lubricant shipments (i.e. oil). This outpaced a -1.8% decline in exports that owed to a sharp drop in overseas coal sales (8%). Economists were calling for a –A$0.9 billion outcome ahead of the release. The decline in oil consumption points to slowing industrial production, suggesting firms see lackluster demand ahead. By extension, this bodes ill for job prospects and the spending climate, leaving us to wonder whether the RBA’s optimism will truly be borne out after the boost from fiscal stimulus runs its course and private demand has to take over.
The US Dollar was sold aggressively against most major currencies after the UK newspaper The Independent published a story saying Persian Gulf oil exporters have been holding secret talks with China, Russia, Japan and France about replacing the greenback with a basket including the Euro, the Japanese Yen, the Chinese Yuan, and even gold as the unit of account for crude prices. Unnamed sources quoted in the article alleged that Russia, Japan, China and Brazil have already held high-level talks including finance ministers and central bank heads to hash out the scheme, which is to be executed within just nine years.
Euro Session: What to Expect
Switzerland’s Consumer Price Index is set to show prices fell at an annual pace of -0.8% for the second consecutive month in September. A print in line with expectations would imply that CPI declined about -0.9% on average through the third quarter, in line with the Swiss National Bank’s latest forecast released last month. To that effect, the release is unlikely to produce much of a reaction from the currency market with traders’ expectations of the central bank’s policy trajectory unlikely to be changed by the metric’s outcome. However, any significant downside deviation from the expected outcome could weigh on the Franc as traders speculate that the central bank may step up efforts to weaken the currency, particularly considering the closely watched EURCHF rate has been inching lower since early August on approach to the SNB’s 1.50 comfort level where previous interventions have taken place.
UK Industrial Production is set to grow for the third consecutive month in August to bring the annual pace of contraction to -8.7%, the lowest in eight months. As with most other economies, UK manufacturing has shown some signs of life in recent months with demand boosted by close to $2 trillion in global fiscal stimulus and continued restocking of depleted inventories. Traders have had ample opportunity to price this moderation into the exchange rate at this point and significant volatility seems unlikely around the release. As elsewhere, the key question that still remains unanswered is whether British industry is can retain momentum after the flow of government cash dries up.
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