The greenback has enjoyed a moderate reprieve against its high yielding counterparts overnight despite notable gains across global equity markets. The kiwi took a south-bound turn after New Zealand Prime Minister John Key talked the Kiwi currency lower, highlighting the negative implications currency strength may have on the economy, while also stating the high dollar “takes the pressure off the Reserve Bank.” It appears this has had a negative impact on short-term Kiwi price action and may have rubbed off on the Aussie which has eased from highs just above 106 US cents.
As widely anticipated, yesterday the RBA kept benchmark interest rates steady at 3.5 percent yesterday and maintained their ‘glass half full’ view of local conditions. While acknowledging significant challenges faced in the euro region and a subdued growth global growth outlook, on balance, the statement painted a fairly positive picture. On China, the statement noted growth has moderated to a more sustainable pace, but “does not appear to be slowing further.” Local inflation is expected to be in line with expectations and business credit has recorded its strongest growth in several years. On the Australian dollar, the statement simply highlighted the local unit has remained resilient despite a marked decline in the terms of trade and weaker global growth outlook. If you look hard enough, the fact that they highlighted this disparity between fundamentals and price action may suggest they are concerned about the high level of exchange.
The Euro remained buoyant overnight alongside equity markets from both side of the Atlantic. Although we’ve seen moderate support for the Euro, it’s failed to make a sustained break through short-term resistance just above 1.2440 and the 55-day moving average at 1.2415. Despite moderate support from risk trends, Spanish bond yields begun to climb higher as markets ponder the likelihood of Spain forgoing their fiscal sovereignty in exchange for financial assistance. Nonetheless, we’ve seen this theme of residual support from last week’s ECB meeting guide markets. There remains an element of blind faith the European Central Bank will indeed “do whatever it takes to preserve the Euro” but given little else is known on the finer points, it’s clear any short-term strength is tentative.
The day ahead will see the release of June home loan data, however the next major directive for the Australian dollar is Thursday’s inflation data out of China and local employment data. The dollar is currently testing short-term support levels at 105.5 US cents.