• Weaker data and negative tone from RBA dampens demand for the Aussie dollar;
• Greenback gained ground as unemployment rate close to six-year low;
• Sterling continued its climb after more encouraging data, BOE rate decision this week.
The Aussie was well bid at the beginning of last week’s trade, breaking through $0.95 against the greenback as markets took the positives from the RBA’s interest rate statement. However, highs were short lived and shock trade balance data sent the Aussie immediately lower but losses seemed to be limited. As markets tried to come to terms with an increased trade deficit as mining investment is clearly diminishing, RBA Governor Glenn Stevens used weakened risk appetite to the RBA’s advantage, attempting to weaken the local unit citing the likelihood of a ‘significant’ fall in the local unit at some point. A reminder on the RBA’s stance that the exchange rate remains uncomfortably high came as a shock to markets, increasing speculation that the RBA’s neutral bias on rates is uncertain.
In a short but crammed week for US markets, payrolls data failed to disappoint and brought some much needed support to the greenback. Payrolls data came a day early due to Independence Day and began the US’s long weekend on an upbeat tone. Data showed that the US economy added 288,000 jobs in June vs a forecast 215,000, bringing down the unemployment rate to 6.1% and came as confirmation of a recovering labour market, essential to the Fed’s guidance on raising interest rates. The greenback posted its largest weekly gain since May as sentiment improved significantly and confidence in a US economic recovery strengthened.
After encouraging manufacturing and construction data from the UK, Sterling climbed to levels not seen since 2008 against the Euro as all signs continue to point towards a hike in interest rates. The market continues to anticipate a change in policy in Q4 2014 or Q1 2015 but the market will be looking for clues from Thursday’s rate decision. I would expect that a hike in rates in Q4 2014 could come as premature and believe that the Bank of England’s recent attempts to subdue the housing market is an attempt to buy time. If their efforts are to work and mortgage demand decreases, the Bank of England may see the measures as a temporary substitute to a rate hike and could lead to a reversal in Sterling at some point.
[B]Tom Williams
Sales Trader[/B]