The Australian Dollar has remained firm against most majors this week on the back of a string of strong local economic data releases. The AUD surged above 0.73 US cents Tuesday evening after the Reserve Bank kept the cash rate unchanged and the release of very strong building approvals figures.
On Tuesday, building approvals for the construction of new homes rose 3.9 per cent in October, much stronger than the three per cent fall the market was expecting. The currency got a further boost after the RBA sounded positive about the economy in its interest rate announcement.
The “Aussie” continued to rally throughout local and International sessions following the release of positive production (GDP) data and hawkish remarks by Stevens. Official figures released by the Australian Bureau of Statistics (ABS) yesterday indicated that Australia’s economy grew by 0.9 per cent in the September quarter, and by 2.5 per cent in the 12 months to September; a better than expected result.
In an address to business owners minutes before the GDP announcement, Stevens hinted that the September quarter result would be welcomed. He went on to add “Let’s not overplay the significance, but the economy is growing and I think that the outlook for continued moderate growth, you would still say that’s the outlook based on this incremental bit of additional information”, adding “I have no further guidance to offer, `chilling out’ or otherwise, on interest rates today”. Although a 2016 interest rate cut cannot be ruled out. The tone of comments from the RBA was sufficiently hawkish to drive up demand for the local currency.
Despite hawkish comments by US Fed Chair Janet Yellen overnight the Australian Dollar to US Dollar (AUD/USD) exchange rate managed to hold above 0.73 cents helped by a drop in US manufacturing activity to its lowest level since the recession ended in mid-2009.
The manufacturing release while by no means a “game changer” acted to lower the probability of a December Fed hike to 70% from 75% and raises the significance of the ISM non-manufacturing November release on Thursday ahead of the all-important nonfarm payrolls report on Friday.
While Yellen avoided mentioning December as a possible launch date, she described conditions as “nearly ripe for the first rate increase in nine years and said that domestic and international threats to US economic growth had diminished”. Moreover, she warned “after having locked the rate near zero for seven years, waiting too long could pose big risks to the economy and financial markets”.
All eyes are now on the US Payroll announcement as guidance as to the direction the Fed will take when they meet next on December 16th. If employers are shown to have added a substantial number of employees in the last month the odds will more strongly favour a 2015 interest rate rise, bolstering demand for the US Dollar.
NZD continues to rally on the back of strong Dairy Data
The AUD to NZD exchange rate remained stable yesterday as improved dairy prices buffered “Aussie” gains. Dairy makes up about 35% of NZ’s total merchandise exports and therefore play a significant role in propping up demand for the NZ dollar. The NZD has made significant gains against majors pairings in recent months driven by a spike in dairy prices linked to a shortage in supply. With prices expected to recover in the near future, the NZD rally like all dairy items may have a short expiry date. Also worth noting, the RBNZ was clear in its last policy statement: if recent currency strength is sustained, “this would require a lower interest path than would otherwise be the case”. The market has already priced in a 50% chance of a 25 basis point cut in December when the RBNZ meets next on December 10th 2015.
Loads of volatility is expected for the remainder of the week with several high tier announcements due out of both local and international markets. Today, the local Trade Balance is due out at 10:30am and is expected to further support the surging AUD. Tonight the UK will release Service PMI followed by an expected rate cut out of the Euro Zone. Later in the evening the US is due to announce employment figures and Non-Manufacturing PMI; followed by an address by US Fed Chair Janet Yellen.
Overshadowing local Retail sales and Canadian employment and trade figures all eyes will be in US Non-Farm Payroll for a hint of a US rate launch.