Brave New World

Dollar facing renewed pressure, Aussie to gain 06/10/2009

The FX market has started the week in muted form, with the US Dollar facing renewed selling pressure. Positive economic data released earlier in the day in Europe supported the EUR and GBP against the dollar, as did profit taking from investors on risk averse long US Dollar positions following Friday’s poor Non-Farm Payroll figures. Risk appetite has since picked up, with a US equity market rally on the back of Goldman Sachs recommending large banks and ISM data showing service sector expansion for the first time in 12 months.

Overall, the lack of any significant statement on the currency markets by the G7 following this weekend’s meeting in Istanbul, also weighed heavily in the US Dollar; particularly in light of statements last week by G7 officials and Geithner restating the “Strong Dollar” policy. Instead, they repeated concerns of “excess volatility and disorderly movements in exchange rates”. Given that the FX markets currently display none of these conditions the absence of any definitive statement shows an absence of substantive support for the greenback. Comments this evening (ET) from the head of the New York Fed William Dudley stating that the Fed Funds rate would remain “exceptionally low for an extended period” has put further pressure on the USD, reinforcing its new found role as a funding currency.

The most notable winner against the USD today was the Australian Dollar, reaching a high of 0.8797 on Monday from the close of 0.8640 on Friday. All eyes are on the RBA interest rate decision, announced later this evening. Although the consensus forecast strongly expects the 3.00% cash rate to be left unchanged, the market has fully priced in a 0.25% rise in interest rates by November. Whether the AUD rally be over following tonight’s decision remains to be seen. However, given the current bearish tone to the the USD, GBP, a more complicated picture for the EUR, and a possibility of intervention in the JPY, any pullback in the AUD is likely to be short-lived, a bullish trend is likely to resume.

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