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FOREX: Australian Dollar Sinks as RBA Opens Door to Interest Rate Cuts

By , Currency Strategist
04 October 2011 08:02 GMT

Talking Points

  • Australian Dollar Sinks as RBA Opens the Door for Rate Cuts
  • US Dollar Consolidates Gains in Quiet Overnight Trading Session
  • EU Finance Ministers’ Meeting in Focus as European Trade Begins
  • ECB President Trichet, Fed Chairman Bernanke on Tap to Speak

Most of the major currencies kept to narrow ranges against the US Dollar overnight as markets digested the sharp surge in risk aversion over the preceding 24 hours that sent the safe-haven greenback and the Japanese Yen aggressively higher versus their leading counterparts. The New Zealand Dollar narrowly outperformed.

Volatility was restricted to the Australian Dollar, which sank as much as 0.7 percent on average across its top pairings after the Reserve Bank of Australia seemingly telegraphed a narrowly rising chance of a forthcoming interest rate cut. RBA Governor Glenn Stevens coyly noted in the statement accompanying the decision to leave benchmark borrowing costs at 4.75 percent that, “An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary,” all the while arguing the pickup in underlying price growth that the bank anticipated has shown itself to be less dramatic than expected. The markets now price in 161bps in rate cuts over the coming year, the most since January 2009, according to data compiled by Credit Suisse.

Looking ahead, the recent centrality of the Euro Zone debt crisis will put the spotlight on a meeting of EU Finance Ministers in Luxembourg. Credit-default swap (CDS) spreads are broadly higher across the region (with the solitary of exception of the Netherlands), hinting the markets are not particularly optimistic in the emergence of a grand bargain that puts sovereign risk fears to bed at the sit-down. Still, traders will keep a close eye on the commentary that emerges from the meeting for clues on where EU policymaking will be steered from here.

ECB President Jean-Claude Trichet and Federal Reserve Chairman Ben Bernanke are also scheduled to hit the wires in the afternoon, with the former speaking to the European Parliament Economic Committee just ahead of Thursday’s interest rate decision while the latter testifies before a joint session of Congress on the US economic outlook. Mr Bernanke is likely to play up the need for fiscal house-cleaning and reinforce the case for “Operation Twist” with warnings about the slowing recovery while Mr Trichet’s comments will be scanned for signs of additional easing and the degree thereof to be announced later in the week.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

21:00

NZD

NZIER Business Opinion Survey (3Q)

25

-

27

23:50

JPY

Monetary Base (YoY) (SEP)

16.7%

-

15.9%

0:30

AUD

Trade Balance (A$) (AUG)

3100M

2000M

1817M (R-)

0:30

AUD

Building Approvals (MoM) (AUG)

11.4%

1.0%

1.8% (R+)

0:30

AUD

Building Approvals (YoY) (AUG)

-5.5%

-15.1%

-14.3% (R+)

1:30

JPY

Labor Cash Earnings (YoY) (AUG)

-0.6%

-

-0.2% (R-)

3:30

AUD

Reserve Bank of Australia Rate Decision

4.75%

4.75%

4.75%

5:30

AUD

RBA Commodity Price Index (SEP)

115.4

-

113.3

5:30

AUD

RBA Commodity Index SDR (YoY) (SEP)

26.6%

-

25.1% (R-)

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

8:30

GBP

Purchasing Manager Index Construction (SEP)

51.6

52.6

Medium

9:00

EUR

Euro-Zone Producer Price Index (MoM) (AUG)

-0.2%

0.5%

Low

9:00

EUR

Euro-Zone Producer Price Index (YoY) (AUG)

5.8%

6.1%

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3022

1.3321

GBPUSD

1.5317

1.5544

Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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04 October 2011 08:02 GMT