As widely anticipated, the Reserve Bank of Australia kept its cash rate unchanged at 1.5%. Traders who wereanticipating a dovish statement were disappointed, despite the central bank saying that a rise in the Aussie would slow the economy. It is no surprise that RBA Governor, Philip Lowe is not excited about the appreciating exchange rate. He stated that the recent currency strength is weighing on the outlook for economic growth and employment, which will result in slower momentum in economic activity and inflation.
The AUDUSD has appreciated by more than 4% in July alone. However, this was mainly due to the weaker U.S. dollar and a spike in commodity prices. The economy which relies on commodity exports, has seen iron ore prices jumping to 4-month highs, after activity in China’s construction sector surged to a new high in more than three years. Similarly, copper prices gained more than 6% to trade at a new 2-year high.
The AUD above 0.8 looks expensive, but without action from the central bank, yield differentials will continue to be the primary driver for the currency pair. The spread between the U.S. and Australian 10-year bond yields has historically served as a key indicator for the Aussie dollar;if the spread continues to widen, I still see further appreciation in AUDUSD.
The Euro also made headlines yesterday, after the single currency traded above 1.18 against the USD, reaching its highest levels in 2.5 years. The EURUSD is up by more than 12% from April lows, and we haven’t seen any meaningful correction since then, thanks topositive European economic data, a hawkish ECB, and the ongoing drama at the Oval Office. As we get closer to the 1.20 benchmark, short positions are likely to come in. The sharp appreciation of the Euro is not only causing problems for European exporters, but soon this will be reflected in prices, thus delaying ECB’s plan to normalize monetary policy. I believe that EURUSD is due to a correction, but this requires strong data from the U.S. to convince traders that the Fed will hike rates again in December -this iswhy Friday’s U.S. labor report will be crucial for traders.
It is a busy economic calendar in the Eurozone – manufacturing PMI’s are due today and most European countries are expected to show continued expansion in activity, but no big surprises. The preliminary Eurozone Q2 GDP is expected to show 0.6% growth on a quarterly basis and 2.1% annualized. It would take a significant event to send the Euro higher from current levels
