On The Eve Of RBA
Traders bid the currency higher on the eve of the Reserve Bank of Australia’s overnight cash rate decision. Although mostly anticipated to keep rates unchanged, market participants remain upbeat of the carry trade opportunity. Given today’s mixed greenback data, individuals still remain steadfast in their interest to earn the rate differential between dollar and Aussie dollar denominated assets. Currently the spread is 150 basis points wide. Moreover, anticipation looms over the next scheduled release of the region’s gross domestic product. Although expected to slow on the monthly figure, the Australian economy is estimated to grow at healthy pace of 2.7 percent I the third quarter.
Leading to greenback bearishness, today’s economic data remained mixed. Although productivity was bolstered in the in the final figure for the third quarter, unit labor costs were to the downside. Suggestive of lower inflationary pressures, the labor cost data lends to earlier speculation that current monetary tightening policy in the U.S. could be on its way out, leaving benchmark rates slightly above 4 percent.
Continuing the upward trend that has been witnessed over the past week, the Aussie major currency continued to rise further testing the intrasession high of 0.7546. Currently consolidating just slightly below, the currency looks ripe for a temporary retracement to 0.7491 (23.6 percent fib level from the recent bull wave). However, the previous option barrier at 0.7550 and psychological round floor at 0.7500 look to pose minor barriers before the aforementioned downward test. Upside potential, nonetheless, remains given a break of the high.
Traders Capitalize On Differentials
Carry traders took further advantage of the rate differential available in the currency cross as current sentiment continues to bolster a zero interest rate policy in the Japanese economy. The move comes in light of positive regional economic data in the land of the rising sun. In the overnight session, overall household spending remained buoyed for the second month in three, rising 2 percent on an annualized basis. On the monthly comparison, the figure declined 0.1 percent, however was comparably positive against expectations of a 0.2 percent decline. Definitively confirming a turnaround in the domestic economy, the figure further boosts the possibility of a turn around in currently loose monetary policy as the economy is now set to expand at a near 2 percent rate. However, given recent comments by both Bank of Japan officials and government heads, without a positive sign of deflationary dissipation current zero interest rate policy looks to remain well into 2006. Further placing unwanted bearishness on the region’s currency, traders are embracing momentum from yesterday’s comments by policy officials on the acceptance and flexibility of current yen levels.
Additionally rising further, the AUDJPY cross continues to consolidate ahead of the Asian hours. Retracing slightly, further downside momentum looks to infiltrate with a floor test of previous consolidation looming over 90.50. A break below would see probable capping at 90.40. Upside potential exists with a break of the intrasession high of 91.40.
Canadian bulls peaked earlier on only to exit center stage following slightly more dovish comments by Bank of Canada officials. With central bankers citing that inflationary pressures seem to have abated slightly, traders pared back positions as it became clear that the current tightening policy might be placed on temporary hiatus in the near term. Although the current Canadian rate, now at 3.5 percent, nearly rivals that of its major current counter the greenback, it still lags behind the current overnight cash rate available in the Canadian economy offering higher rates of return. As a result, traders continued to bid the cross higher. Separately, incremental downside in crude contracts and other energy commodities was reflected in the bloc representative.
Still Further Strength
Nonetheless, other aspects of the Canadian economy are forging ahead. According to Statistics Canada, building permits rebounded from last month’s dip, rising 1.2 percent against an expected month of unchanged figures. Additionally, manufacturing activity rose to print an expansive 65.8 versus estimates of a 61 print. As a result, although inflation remains restrained at the moment, current economic data may bolster further hike considerations if the recent trend continues.
Keeping in a steady range, the cross is currently at an apex. Finding a test of a near term upside trendline, price action looks imminently retraceable. First floors are present at 0.8685 (23.6 percent fib level from the weekly bull wave) with strong capping potential at 0.8661. Comparably, upside potential remains till the 0.8750 ceiling.
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