• RBA insists that a weaker exchange rate is necessary in achieving balanced growth;
• Sterling relatively unchanged following an uplift in industrial and manufacturing production;
• German industrial production drops in August, Euro survives against a weaker greenback;
• Early dollar strength reversed as IMF cuts global growth outlook, Japanese Yen favoured.
As was widely expected from yesterday’s rate decision, the RBA kept interest rates unchanged for a fourteenth month at 2.5% as the central bank retained a neutral monetary policy stance. The big uncertainty heading into the meeting was whether Glen Stevens would be accepting of a 7% fall in the Australian dollar since the previous meeting, or whether he would use the opportunity to jawbone the Aussie dollar towards their idea of fundamental value. The accompanying statement dropped the tagline, ‘above our estimates of fundamental value’ but maintained much of the same rhetoric such as ‘high by historical standards’ when referring to the AUD exchange rate. Despite a lack of hawkish tone that Aussie bulls were looking for, a weaker greenback saw the local currency climb above $0.88 overnight as the RBA sit on the fence for another month.
Industrial and manufacturing production from the UK yesterday painted a somewhat brighter picture for the UK economy and saw Sterling find some support, particularly against the Euro after yet more dismal data prints from the struggling union. UK industrial production showed no expansion in August but manufacturing ticked up 0.1% throughout the same period spurring some buying activity in the British pound. A sharp fall in German industrial production set an early pace for the Euro falling against all major peers as fears were sparked that Europe’s largest economy could be heading towards recession following geopolitical tensions and slowed Chinese growth. All hangs on Q3 GDP data from the German economy which recorded a 0.2% in GDP in Q2. The Euro managed to make back all lost ground against a weaker greenback overnight as global markets become weary that US dollar strength has become overheated.
The US dollar continued its weekly reversal yesterday, USDJPY trading as low as ¥107.81 overnight as the International Monetary Fund cut their global growth forecasts, favouring the safe haven Japanese Yen. The Bank of Japan also kept their bond-buying program unchanged in their policy decision yesterday, pledging to increase the monetary base at an annual pace of $645 billion, as markets had expected. There is a sense that dollar bulls have become uncomfortable holding long positions given its recent strength and I think what we’re seeing is consolidation rather than a reversal. The probability that Federal Reserve QE will come to an end later this month will likely stir up some hype around a stronger greenback once again and could mark the beginning of a broad based dollar bull run providing data can remain on track and policy divergence remains intact.