ECB Rate Cut Steers FX Markets | Daily FX Commentary

• Aussie dollar breaks above $0.94 on weak US non-farm payroll data;
• Sterling in jeopardy as Scottish referendum ‘Yes’ camp builds;
• ECB deliver further interest rate cuts in absence of outright QE;
• Greenback rally comes to an abrupt halt after US August jobs report.

Despite a brief setback early in the week following the RBA’s decision to hold interest rates at 2.5% for a thirteenth consecutive month, the Aussie dollar was largely a beneficiary of increased risk appetite throughout the week as the Ukrainian/Russian ceasefire appears to have held, for now. A European interest rate cut favoured the carry trade towards the end of the week and saw the Aussie dollar break away from the $0.93 anchor that has been prevalent for some time as global markets continue to favour the Aussie’s comparatively high yield. Domestic data including Australian GDP was received largely in line with expectations with direction largely sought from overseas data and this theme will likely continue throughout the coming week. A disappointing set of August jobs numbers from the US saw the Aussie break above $0.94 on Friday evening, bumping into sellers at this key resistance to eventually close the week above $0.9370.

A slowdown in UK manufacturing set the pace for the pound early last week, markets shrugging off some encouraging construction numbers and mortgage approvals data. The Scottish vote of independence remains at the forefront of Sterling direction, early indicators suggesting that the end is nigh for the three-century year-old union. As analysts remain uncertain of the economic impacts that an independent Scotland would have on the UK’s economy, the Bank of England are likely to be in the same boat and we are seeing expectations of a forthcoming interest rate hike quashed, hence Sterling remains in the doldrums. Despite two voting members of the MPC calling for an early rate hike in the August meeting, low inflation and weak wage growth, combined with mounting ‘Yes’ votes for Scottish independence is likely to see the Bank of England stick to their guns and maintain low interest rates for longer.

A weaker Euro appeared to be a high hurdle to jump for the ECB earlier in the year as global investment flows favoured the currency union. Loosened monetary policy and a commitment to tackle a troubling deflationary environment with an iron fist has enabled the ECB to achieve such an objective, last week delivering a further cut in interest rates in a bold bid to stimulate the economy. The ECB unexpectedly cut the benchmark refinancing rate to 0.05% from 0.15% and made a further cut to the deposit rate which now stands at -0.2%. Although an outright QE package was not delivered at this month’s meeting, Mario Draghi has confirmed that the ECB will proceed in purchasing a broad portfolio of asset backed securities commencing in October, with full details to be revealed after the ECB’s next meeting. The Euro lost over 200 points against the greenback as markets priced in full blown QE and the likelihood of a full package at next month’s meeting.

The greenback rally came to an abrupt halt on Friday as August non-farm payrolls recorded the smallest rise since December, the US adding only 142,000 last month versus expectations of 230,000. A drop in the labour market participation rate assisted in bringing annual unemployment down from 6.2% to 6.1% last month. Despite a blip in the August data, greenback weakness saw the buyers step in as the dollar remains the pick of the bunch between a basket of counterparts. The notorious hawk, Charles Plosser, suggested that the Fed are moving closer to achieving their goals which saw the greenback jump back to life, however next week’s meeting will likely provide further insight to Fed policy.

[B]Tom Williams
Currency Analyst[/B]