A$ Under Pressure as RBA Continue to ‘Sit on the Fence’ | GO Markets FX Commentary

• RBA leaves rates unchanged at 2.5% citing period of stability in interest rates;
• Sterling climbs for second day as UK services PMI beats expectations;
• Greenback supported after an uplift in services and manufacturing data.

The Australian dollar began yesterday’s Asian session on the back foot ahead of the RBA’s interest rate decision as Chinese services PMI read to the downside reflecting the impact of a slowing Chinese property market. Little was expected from the RBA’s board meeting, rates were left on hold at 2.5% for a 12th consecutive month and markets were more concerned with the language used in the accompanying statement. In confirmation of the RBA’s neutral bias on monetary policy, the Aussie dollar traded moderately higher to $0.9343 before succumbing to pressure following very weak Chinese services data. Wording in the policy statement was in line with the July statement, citing strength in the local currency by ‘historical standards’ and ‘the most prudent course is likely to be a period of stability in interest rates’. The RBA appear comfortable with current policy and markets will have to wait for Friday’s statement on monetary policy for an indication of growth and inflation forecasts. A$ trades slightly above $0.93 this morning.

Appetite for the UK’s currency has turned around over the last two trading days after solid construction PMI data on Monday and an uplift in services PMI overnight, bouncing 70 points from Monday’s lows. High expectations in UK data have led to moderately missed forecasts in recent weeks and put pressure on the pound but we’re starting to see sentiment turn. We could see one or two members of the MPC vote for a rate increase at tomorrow’s BoE rate decision and Sterling will likely remain supported heading into the meeting. High levels of household debt requires careful attention when the Central Bank come to lift interest rates as cited recently by the Deputy Governor. Recent strength in the UK pound indicates inflation will remain within the Bank of England’s target towards the end of the year suggesting that an interest rate could come later than expected, hence a reversal from its July highs against the Greenback.

As the Euro remained under pressure ahead of tomorrow’s ECB meeting, the Greenback climbed to a 9-month high as US services and manufacturing data read to the upside, supporting the view that the US economy remains firmly on the recovery path and an interest rate hike is likely mid next year. Markets are now pricing in a 58% chance of a rate hike by July next year as the Fed appear more hawkish and economic data continues to meet expectations. EURUSD stands at $1.3390 this morning and the case for remaining short the pair is becoming increasingly apparent.

[B]Tom Williams
Currency Analyst[/B]