Don’t take the rise in the value of the Aussie dollar in the past day or so as anything more than a market-driven correction as a bunch of smarty pants speculators trying to save their bets against the currency in the face of Tuesday’s major change in policy from the Reserve Bank.
Bloomberg belled the cat yesterday when it reported that all those clever traders who had shorted the dollar, had been caught out by the rapid rise of 2 USc, and forced to cover their positions in the wake of the Reserve Bank’s post board meeting statement on Tuesday.
Also helping was the sheepish way share markets stopped the silly slide of Monday and Tuesday, which has nothing to do with the fundamentals of the US economy, and more to do with nervousness about the overstretched valuations for a host of leading companies.
Traders short the Aussie dollar because it is usually part of their punt against China – to be short in the Aussie currency is to try and ride the news flow from China – and it has been negative for the past fortnight with the weaker than expected readings of manufacturing and services.
The next round of monthly economic data for last month is due out towards the end of next week, according to media reports. It has been has been delayed by the Spring Festival/Lunar New Year holidays which are about to end.
Shorting the Aussie dollar is one of the favoured strategies of big global investors.
Bloomberg said in yesterday’s report that "Leveraged funds increased net positions betting on Aussie declines to 63,973 in the week ended Jan. 28, according to Commodity Futures Trading Commission data, the most in figures going back to June 2006." Now that’s bearish, but the statement from RBA Governor Glenn Stevens crunched that.
In his statement, Mr Stevens wound back his attempts to ‘jawbone‘ of the dollar lower and left the question of its value very much up to the market, which proceeded to send it higher. The rise accelerated overnight Tuesday, but ended in Asian trading yesterday morning.
In his comment, Mr Stevens said,"The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy".
That is a big difference to what he has been saying.
In comment early last November he said the currency was "uncomfortably high". The currency was trading around 95 USc when he said that. It has since fallen to a three year low of 86.60 USc in late January.
On November 21 he strongly hinted at possible intervention if the dollar’s value remained too high for too long.
Of course none happened, but the market heeded the threat and down went the currency.
It seems from then on there was a conjunction of events in the Aussie dollar market for traders – the desire of the RBA to force the value of the currency lower and the continuing bearishness about the health of the Chinese economy.
Now the dollar is no longer "uncomfortably high" and the final paragraph of his statement, which as always, has the most interesting bit of the monthly statement because of the way it is used to signal policy, helped push the currency higher.
Mr Stevens said "In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates."
After peaking at 89.31 USc overnight, the dollar lost a cent yesterday as the frantic buying pressure in the currency eased, but it then regained the 89 US cent level in overnight trading Wednesday.
But it also wouldn’t surprise to see it return to around 87c within a week or earlier. Also helping is the continuing easing of stresses in emerging markets.
Ahead in the rest of the week are a couple of major imponderables for the currency and its value.
First up we have the results of the monthly meetings of the Bank of England (no impact on the Aussie) and the European Central Bank which could do something dramatic to try and head off fears of deflation.
That could involve another rate cut, or some sort of ‘quantitative easing’ to try and spark a rebound in inflation via a fall in the value of the euro. The ECB last cut rates in November, but that has not had any impact on falling inflation so far.
Then on Friday night we have the monthly report on the heath of the US jobs market.
Some analysts say it will be a repeat of December’s weaknesses, with the cold weather again hitting job creation. Others say that won’t be the case and up to 190,000 new jobs may have been created last month.
No one knows and for currency markets that usually means safety and that means no real change in relative values.
Locally we have retail sales for December and the trade figures for the same month later today (and housing finance and jobs data for February next week).
In its current state a good December sales report could see the dollar resume its upwards move for a while, and further pressure the shorts.
