euro open

Australian Dollar Drops Despite RBA Rate Hike, Bank of Japan Fuels Yen Volatility

The Australian Dollar fell even as the central bank delivered another interest rate increase on speculation that tightening will pause from here, while the Japanese Yen turned sharply volatile as the Bank of Japan held an unscheduled special monetary policy meeting. German unemployment and Swiss GDP top the calendar in European hours.

Key Overnight Developments

• Yen Plummets, Then Quickly Rebounds as BOJ Holds Special Policy Meeting
• Australian Dollar Drops Despite Another Interest Rate Increase From the RBA

Critical Levels



The Euro oscillated in a narrow range around the 1.50 mark against the US Dollar in overnight trading. The British Pound trended lower for much of the Asian session but rebounded just ahead of the opening bell in Europe to yield a relatively flat result.

Asia Session Highlights



The Reserve Bank of Australia raised interest rates by 25 basis points for the third consecutive month as expected, taking borrowing costs to 3.75%. Interestingly enough, the Australian Dollar sold off on the announcement, dropping as much as 0.8% against its US counterpart. RBA governor Glenn Stevens was typically chipper, saying Australia’s downturn was “mild” compared to other major economies and boasting that economic growth is likely to be close to trend and inflation close to target in 2010. The most plausible explanation for the outcome is Stevens’ deliberate use of the past tense when commenting on rate increases remarks. The RBA chief said that “material” reductions of monetary stimulus in recent meetings will work to increase the sustainability of growth and keep inflation close to target, alluding to no further increases in the future and thereby leading traders to think that perhaps a wait-and-see period will commence from here.

The Japanese Yen slumped against the spectrum of major currencies after the Bank of Japan announced a special, unscheduled monetary policy meeting amid speculation that FX intervention would be on the table USDJPY soared to 14-year highs last week, threatening the critical export sector. The currency reversed course with equally sharp momentum after the meeting’s outcome proved relatively tame. The only significant change to policy was the introduction of 10 trillion yen in new lending that the central bank said will lower long-term borrowing costs, a nod to pressure from the Ministry of Finance that that had pressured the BOJ to keep its asset-purchase programs in place as the government issues new debt to finance the swelling budget deficit, putting upward pressure on the long end of the yield curve.


Euro Session: What to Expect



Switzerland is expected see Gross Domestic Product expand 0.3% in the third quarter, becoming the latest economy to see a return to positive growth since the outbreak of the global economic downturn last year. However, traders are far more discriminating in gauging the optimism that comes from such announcements at this point on growing concerns about the sustainability of the recovery once the impact of fiscal stimulus dissipates. To that effect, traders will keep a close eye on where Switzerland’s growth comes from. Indeed, a rebound built on government spending and an export sector that relies heavily on Euro Zone demand would not say much about the ability for self-sustaining growth to retain momentum after the flow of government cash dries up domestically and in the neighboring currency bloc.

In Germany, the Unemployment Rate is set to hold flat at 8.1% in November as the economy sheds 5,000 jobs. The figure is roughly in line with the job cuts announced by publicly-listed German companies last month, so assuming they will be implemented as expected, a print that validates forecasts seems reasonable. However, the larger question is what happens to the jobless rate after the government-sponsored program of paying firms to keep staff on shorter schedules rather than firing them is unwound along with other fiscal stimulus. Germany’s new right-leaning ruling coalition will not be too keen to continue expanding the fiscal deficit, so additional public support for the economy seems unlikely. This suggests that although Retail Sales are set to improve in October, sustainable growth will be hard to maintain in the months ahead as job losses weigh on incomes and discourage spending. Meanwhile, the broader Euro Zone Unemployment Rate is set to rise to 9.8%, a record high.

Turning to the UK, Nationwide House Prices are set to extend gains to add 2.4% in the year to October, although the rebound since prices bottomed out in February seem to be driven by shallow supply rather than robust demand, so the implications of higher prices for the health of the overall economy are somewhat questionable.

For real time news and analysis, please visit http://forexstream.dailyfx.com

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

Resources

• free demo account
• forex courses
• open an account
• real time news
• free webinars