Aussie Dumped on Rate Surprise, Rest of Majors Consolidate

Last updated 2/2/2010 5:42 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• RBA shocks by keeping rates at 3.75%
• UK Construction PMI rises to 48.6 vs. 47 eyed
• Nikkei up 1%+ but Europe slips on open
• OIl slides to $74.50/bbl after run up from yesterday
• Gold above $1100/oz. again

Overnight Eco

• AUD NAB Business Confidence 8
• AUD RBA Rate Statement 3.75% vs. 4.00%
• JPY Monetary Base 4.9%
• JPY Average Cash Earnings -6.1% vs. -2.6%
• NZD Labor Cost Index 0.3% vs. 0.5%
• EUR German Retail Sales 0.8% vs. 0.9% eyed
• EUR PPI 0.1% vs. 0.0%
• GBP Construction PMI 48.6 vs. 47

Event Risk on Tap

• USD Pending Home Sales expected at 0.6%
• USD Total Vehicle Sales expected at 11.4M

Price Action

• USD/JPY drops to lower part of the range at 90.50 as equities sell off in Europe
• AUD/USD shellacked for 100 points after RBA suprises by keeping rates low
• GBP/USD tight range as 1.5900 support holds for now
• EUR/USD 1.4000 remains cement ceiling for now, but runs to 1.3950 suggest a probe later

A quiet range bound  session in overnight trade today with the exception of the Aussie which was shellacked for more than 100 points in mid day Asian trade today after the RBA shocked the market by keeping interest rates at 3.75%  versus expectations of another 25bp rate hike.  The RBA completely wrong footed the market which had assigned a 79% probability to a rate hike ahead of the event.

In choosing to err on the side of caution, the RBA was clearly concerned with two key factors – the possibility of tightening by the PBOC and the nascent signs of softness in the Australian housing market. As we noted earlier, “monetary authorities in Canberra are clearly concerned about the prospect of tightening from the China, judging that any such move from the PBOC would naturally temper economic activity in Australia. Due to its geographic proximity, Australia has been the biggest beneficiary of China’s torrid growth and will therefore be the most vulnerable economy to any slowdown from Chinese demand.”  

For the near term the Aussie remains vulnerable to a further selloff as rate hike expectations are pared dramatically.  The markets are already projecting a halt for the next two meeting indicating that a rate hike will come no earlier than May. Furthermore, given the ultra low level rate environment extant everywhere else in the G-20, the RBA may have decided that  the normalization  level in monetary policy will now end at 4.00%-4.25% versus earlier expectations of 5.00-5.25%. Still, while it may face turbulence in the near term the Australian dollar continues to carry the highest yield in the G-20 universe and the unit is likely to find support at the 8500 figure from longer term value players.

Elsewhere the eco docket was decidedly unexciting with only a smattering of second tier data on the calendar. In Germany the Retail Sales rebounded  to 0.8% gain from the massive -1.7% decline the month prior.  Nevertheless Retail Sales in Germany contracted by -1.8% in 2009 – the worst such performance since the introduction of the euro as the lingering impact of the global recession continues to weigh on consumer sentiment in the region.

In UK the construction PMI surprised to the upside rising to 48.6 from 47.0 the month prior. This was the best reading since March of 2008, but still remains below the 50 boom/bust line. Cable received only a temporary boost from the data, but has managed to hold on to the 1.5900 handle. The unit remains pressured by political and fiscal issues, just as the UK economic data has finally turned unambiguously positive. Tomorrow’s PMI Services report could tip the balance of power in favor of the bulls if it confirms the latest improvement in the data.

Meanwhile in North America today the calendar also takes a pause ahead of tomorrow’s busy slate with only Pending homes and month vehicle sales on the schedule.  We may see continued consolidation for the rest of the day  as rallies appear to be capped by key resistance levels of 1.4000 in the EUR/USD, 1.6000 in GBP/USD and 91.00 in USD/JPY for the time being.

FX Upcoming

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.