Forex Trading

The Australian Dollar pushed higher to challenge the 0.83 level against its US counterpart in overnight trading after a speech by RBA Governor Glenn Stevens struck a hawkish tone, hinting that the central bank is now actively trying to time a return to higher interest rates.

Key Overnight Developments

• Australian Leading Index Fell for First in Four Months, Says Conference Board
• National Australia Bank Says Business Confidence Rose to 15-Month High in Q2
• Australian Dollar Surges as RBA’s Stevens Talks Up Economy, Hints at Rate Hikes

Critical Levels



The Euro advanced in overnight trading, testing 1.4270 ahead of the opening bell in Europe. The British Pound followed suit, adding 0.2% against the greenback.

Asia Session Highlights



New Zealand’s Trade Balance sank into deficit in June, revealing a monthly shortfall of –NZ$417 million. In annual terms, the deficit widened to –NZ$3.2 billion. The discouraging result came as exports fell 11% from a year before, the largest annualized decline since July 2007. We had forecast the outcome in our New Zealand Dollar Weekly Outlook, noting that outbound shipments were likely to take a beating after the local currency gained nearly 1% in June after jumping 8% in the previous month, making New Zealand’s goods comparatively more expensive for overseas buyers while boosting domestic purchasing power of foreign products. The release may weigh on the currency in the days ahead as it reminds the markets of New Zealand’s credit outlook downgrade by Fitch, which cited the “persistently large current account deficit” as a reason for concern about the country’s medium-term growth outlook.

In Australia, Conference Board’s Leading Index fell for the first in four months in May, dropping -0.1%. April’s reading was also revised downward to 0.3% from the originally reported 0.7% result. The metric tracks a number of leading indicators including rural goods exports, building approvals and stock prices to gauge the short- to medium-term trajectory of the overall economy. Perhaps the most important takeaway from the report is that the sales-to-inventory ratio, the largest component of the index, fell for the sixth consecutive month to reveal companies continue to suffer from lackluster demand. This underscores an increasing disparity between market sentiment and the underlying fundamentals of the economy. Buoyant stock markets and money supply growth had catalyzed the most recent run-up in the index, a dynamic that may be repeated in the forthcoming release considering Australia’s S&P/ASX 200 benchmark equity index added 3.6% in June. However, the equity rally seems hardly sustainable if sales growth remains lifeless, robbing firms of the kind of earnings that will not disappear once cost-cutting invariably reaches its natural limits.

Separately, National Australia Bank’s measure of Business Confidence printed at -4 in the second quarter, the highest reading since the three months ending March 2008. The forward-looking component of the report points to continued improvement in overall business conditions in the third quarter, albeit at a much slower pace than this time around. Employment and orders are both expected to improve, though firms’ profitability is forecast to decline.

Reserve Bank of Australia Governor Glenn Stevens struck a decidedly hawkish tone at a speech in Sydney, driving home the point that going forward the central bank is now actively trying to time a return to higher interest rates. Stevens said Australia is faring better through the global downturn than other developed economies, noting that “confidence has recovered ground” and boasting that “unemployment is rising slower than expected”. He went on to stress that central banks should not relax their commitment to keep inflation anchored through the recession, a clear hint that global tightening of monetary policy should now be on the table. That said, Stevens conceded that some stimulus needs to remain in place for now and conceded that the timing of unwinding expansionary policy presents a challenge. The market greeted the RBA chief’s comments, with the Australian Dollar surging 50 pips in a mere 30 minutes.

Euro Session: What to Expect



The UK CBI Distributive Trades report will offer insight on short-term trends in the retail and distribution sector. Retail Sales surged in June but the metric have exhibited extraordinary volatility since the beginning of this year so traders will be eager to look for any signs that a discernable trajectory is being established. On balance, cues from the labor market seem to point to subdued retail activity for the time being, with the jobless rate to approach 9% by the end of next year for the first time since 1994, trimming disposable incomes and weighing on spending.

In Switzerland, the UBS Consumption Indicator that aims to forecast the trend in private spending in the coming 3-4 months is likely to fall to a fresh 5-year low in June as the pace of unemployment continues to push higher, ticking up to a seasonally-adjusted rate of 3.8% in the same period for the first time since September 2005.

Written by Ilya Spivak, Currency Analyst
Article Source - Australian Dollar Surges as RBA Chief Talks Up Economy, Hints at Rate Hikes (Euro Open)