Geopolitical Tensions Continue to Dictate Direction | Go Markets Daily FX Commentary

• RBA cut growth forecasts following disappointing unemployment data;
• Sterling remained under pressure as geopolitical tensions mounted;
• News of Italy’s return to recession confirms fragility of European economy;
• Traders dump the Greenback for Japanese Yen over Iraq fears.

Locally, the big ticket item on last week’s docket was undoubtedly labour market data released mid-week which certainly took the market by surprise. Opinions were mixed as to what the data would reveal, but more importantly how it would reflect in the RBA’s statement on monetary policy on Friday. An uplift in the number of Australian’s on the job market and a steep fall in the number of part time jobs in July saw the unemployment rate rise to 6.4% in July. The Aussie dollar subsequently collapsed as those hopeful of a rate hike within the next 12 months had their expectations quashed, the market now prices in a 50% chance of a rate cut within the next 12 months. Friday’s statement on monetary policy confirmed a cut in growth and inflation forecasts following the data, adding to losses in the Aussie dollar. The local unit managed to make back some of its losses against the Greenback on Friday afternoon and remarkably closed the week only 30 points lower than Monday’s open.

Concerns surrounding the time at which the Bank of England will raise interest rates continue to dominate the headlines and softer economic data remained a worry to Sterling bulls. Weaker prices in high street shops and missed industrial output forecasts both contributed to Sterling weakness as the pound moves further away from highs recorded in July. The next major move for the pound will likely stem from labour market data this week and the release of the Bank of England’s quarterly inflation report where we can expect to see officials offer guidance and opinion on future monetary policy. Minutes from last week’s rate decision meeting are to be released later this month and some expect at least one member of the committee to have voted for a rate hike as early as August.

In last week’s ECB meeting, Mario Draghi emphasised the risks posed by escalating political tensions in Russia on the European economy as the sanctions battle continues. Many sought guidance on the likelihood of QE in tackling European deflationary pressure and although it was suggested ‘if necessary’, no additional guidance was given. Suggestion was made that the ECB’s version of QE would involve the purchase of sovereign bonds, however many doubt the success of such a program considering German yields are already close to 0%; German 2-year yields dipped marginally below 0% last week highlighting the difficulties associated with the currency union.

The greenback received broad support early in the week as data increasingly points towards a more hawkish Federal Reserve. However, on the commencement of US air strikes on Iraq amid conflict in the Kurdish region of the North, the Japanese Yen was aggressively bought as markets favoured the traditional safe haven currency. It is looking likely that trade this week will continue to be led by geopolitical tensions, however a string of economic data will be released from the US this week including retail sales, PPI and jobless claims, all of which will provide a clearer picture on the Fed’s next policy movements.

[B]Tom Williams
Currency Analyst[/B]