• Aussie dollar succumbs to Greenback strength, breaking below $0.92 overnight;
• Sterling experienced a small bounce on BoE rate hike comments;
• Greenback rally continues following hawkish Fed researcher comments.
Aussie dollar resilience has been tested in recent trading sessions at the hands of a broadly supported US dollar, opening this morning only a fraction above $0.92. A drop in home loans and weakened business confidence data set the pace in early trade yesterday and losses were only extended overnight before finding its feet at $0.92. Loans to owner occupiers grew 0.3% in July, less tham the 1.0% forecasts, whilst loans to investors unexpectedly jumped to 6.8% suggesting that rental yields remain attractive. Whilst business confidence remained resilient in August, sentiment amongst business executives dropped last month but could be due to a surprise uplift in the previous survey. As the Federal Reserve approach the end of their bond purchase scheme next month, there appears to be growing scepticism of Aussie dollar strength, particularly as the Australian dollar yield advantage will likely be reduced over the next 9 months.
At the annual conference of the Trades Union Congress, Governor of the Bank of England Mark Carney told delegates to expect interest rates to rise by spring next year in order to protect the BoE 2% inflation target. Whilst comments saw Sterling bounce from lows against a basket of currencies, there are a number of political and economic obstacles that may throw the Bank of England off course and Carney’s reputation for delivering mixed messages should not be ignored, the market is only too aware of this. Despite comments that May’s general election will not prevent a rate hike if required, a Scottish vote for independence would present an abundance of economic risks, of which the market remains uncertain of. What traders are aware of is that there will likely be stumbling blocks, long negotiations and uncertainty along the way, all of which will be prevalent for some time if 18th September referendum leads to Scottish independence and the Sterling sell-off may not be over yet.
As the US approaches the end of its bond buying package next month and economic data points to a broad recovery, expectations of a rate hike by the middle of next year will likely see greenback support continue for some time. Most of the support seems to have stemmed from San Francisco Fed research which suggested that markets are underestimating the chance of a rate increase by the middle of next year. The greenback approached 6-year highs against the Japanese Yen whilst the Euro managed to resist pressure and rebound after falling to its lowest level since July 2013. Policy divergence is key here and for as long as the BoJ and ECB remain dovish in the face of economic uncertainty, greenback strength will prevail. Sterling is faced with different pressures, largely the uncertainty surrounding next week’s Scottish vote for independence.