Mighty Dollar Deflates During Europe’s Timeout

Currency pairs that have a stronger affiliation to Chinese data were under pressure from recent weak numbers. However, after Chinese trade data this morning they are beginning to smell more like roses, albeit temporarily. China’s exports rose +5.1% in July from a year earlier while imports advanced +10.9%, resulting in a +$17.8 billion trade surplus that beat almost everyone on the street. The Aussie, and her smaller sister the Kiwi, have both been a net winner and this despite Australia’s disappointing domestic employment numbers. It seems that investors have also moved on from their concerns about the impact of Fonterra’s quality issues on the NZD, while local job numbers support the currency.

The AUD so far has managed to rally to a new weekly top as stronger than expected import data from China managed to offset the country’s own loss of jobs. The currency has traded a new high just under 0.9100 cents outright earlier this morning. The country’s unemployment rate remained steady at +5.7% last month, but the number of people employed dropped by -10.2k in July compared with median estimates of +5k. The number of full-time jobs declined by -6.7k and part-time jobs fell by -3.5k on the month. Even more disappointing was the participation rate dropping to 65.1% in July from 65.3% in June.

With China’s imports rising +10.9% on the month is good news for the Aussies. They managed to post record exports of both coal and iron ore to its largest trading partner. The newfound currency’s belief may well depend on the extent to which the RBA lowers its economic growth forecasts in its quarterly statement on monetary policy released tomorrow. The currency could easily turn on the extent to which the next two-year growth forecast gets downgraded. Interest rate traders are still trying to reconcile the fact that there was not an “explicit” easing bias in the RBA’s statement accompanying the interest rate cut earlier this week. Many are anticipating the AUD to peak around $0.92-93 before interest rate differentials begin to apply pressure again.

The NZD path has been a much slower grind higher and has yet to break through the psychological +0.8000c threshold outright. In contrast to its antipodean neighbor, New Zealand expanded its workforce +0.4% in Q2, adding +8k more workers than in the first three-months of this year. House prices have also managed to advance +8.1% y/y in July, compared with the previous gain of +7.6% for June.

The ‘participation rate’ dropping is not an isolated phenomenon. Last week’s NFP print indicated that the US’s level had dropped to a new four-month low, brushing +63%. With the unemployment rate continuing to fall for the “wrong reasons” — weak participation — the Fed will likely change its unemployment rate “thresholds.” If that does happen surely QE will remain a long way off? Both the fixed income and cash market seem to be pricing in tapering beginning as soon as next month.

Staying in Australasia, other central bankers towed the line as to be expected. Bank of Korea kept their benchmark interest rates steady as better economic data boosted confidence in prospects of continued economic recovery. The central bank maintained the seven-day repo rate at +2.5%. Their economy has managed to expand at its fastest pace in over two-years in Q2 as GDP advanced +1.1% q/q.

The Bank of Japan managed not to ‘ruffle any feathers’ either last night. Policy makers refrained from accelerating monetary stimulus, meeting analyst expectations as they kept their level of monthly purchases steady. The BoJ’s assessment of the economy was unchanged at the conclusion of their two-day meeting earlier this morning. Members voted unanimously to maintain its policy of boosting monetary policy by ¥60 trillion per-year. Policy makers are staying the course believing that Japan’s economy is starting to recover “moderately.”

The yen’s flight higher continues to put pressure on the markets weaker short yen positions out there. Renewed speculation that the Fed will start to reduce liquidity as early as next month is applying pressure on global financial markets. Yen has been a net gainer in the “uncertainty department.” Not helping the dollars plight against the currency from the ‘rising sun’ is the uncertainty over what the BoJ will do if Abe’s government introduces a new sales tax next year. Uncertainty has the current market, with its weaker participation levels due to the time of year, favoring less risky positions. This is all a plus for the safe haven yen.

Everyone and their mother have been trying to put a cap on the 17-member single currency. A bumper week of economic data for Germany, coupled with a confirmation of its AAA rating yesterday has boosted hopes that Europe’s solid “backbone” is again gaining some economic traction. The scope for the EUR remains on the upside for a retest of the 30-day upper Bollinger band just above 1.3430. Despite liquidity remaining a premium, the currency’s daily momentum remains positive, adding to its overall upside potential.

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EUR Slow To React, Not GBP Or JPY

Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX

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