The Australian Dollar is by far the weakest currency on the day thus far, and should continue to be one of the weaker currencies for the remainder of the day after the Reserve Bank of Australia surprised markets by leaving rates on hold at 4.50%, while also offering a far less than hawkish accompanying statement. Although the central bank conceded that higher rates would be appropriate at some point in the future, comments that the “financial markets were still uncertain” and “overall credit growth remained subdued” were enough to send chills down the spines of Aussie bulls.
Technically, the pullback in the currency is certainly warranted, with daily studies rolling over from overbought after the antipodean rallied most impressively against the buck over the past 5 weeks. Rallies have stalled about a hundred points off the key multi-year highs from 2008 by 0.9850, but as we have mentioned in our analysis, the Australian Dollar sits by longer-term cycle highs and is at risk for a material pullback over the medium and longer-term. The fundamental catalyst has yet to fully reveal itself, but we anticipate that today’s rate decision could start to paint that picture with an economy that is becoming more aware of just how reliant it is on a shaky global outlook.
One must not overlook some other key developments over the past few hours that only help to reaffirm the case for additional Aussie weakness. On the data front, Australian retail sales have come in softer than expected, while at the same time, China services PMI has dropped in September. Aussie bulls have been very quick to discount problems in the US and Eurozone, on stronger local fundamentals and a very upbeat China outlook, and although it is only one day’s worth of economic data, the results are sure to force some reconsideration of positioning.
Another major development has been the latest Bank of Japan rate decision which has opened some decent selling in the Yen after the BOJ also surprised markets by easing monetary policy further, effectively lowering rates to 0.0% (0.0%-0.10%) and concurrently stepping up asset purchases. The BOJ cited a strong Yen and slower global economy as the reasons for the Japanese slowdown and deterioration in corporate sentiment.
Looking ahead, Swiss inflation data (0.0% expected) is due out at 7:15GMT, followed by German services PMI (54.6 expected) and Eurozone services PMI (53.8 expected) at 7:55GMT and 8:00GMT respectively. UK services PMI (51.0 expected) is then out at 8:30GMT, along with UK official reserves (changes), while Eurozone retail sales (0.2% expected) caps things off for the European economic calendar at 9:00GMT. US equity futures are tracking marginally higher, while commodities are also bid, with gold still just off of its record highs.
Written by Joel Kruger, Technical Currency Strategist
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