USD losing steam, AUD, firm, INR bounces back

Risk appetite has sustained an improving trend since the end of August. A combination of an easing in tensions surrounding Syria and firmer data globally have helped to shore up sentiment. Notably the Baltic Dry Index has surged over recent days too, pointing to an improvement in global growth prospects in the months ahead.

US Treasury yields have lost some upside momentum as tapering worries have eased, providing relief to risk assets including emerging market currencies. Consequently the USD continues to lose ground and looks vulnerable to further slippage in the days ahead. Australian employment data and Eurozone industrial production will be the main data releases of note today.,

In Asia, central banks in Korea, Philippines and Indonesia will follow the RBNZ overnight with policy decisions. No change in policy is expected from any of the central banks. Indeed, the recent firming in the rupiah suggests that there will be less urgency for Indonesia’s central bank to hike rates to protect the currency. The Indian rupee has been the best performing currency since the start of the month as portfolio capital has returned. In the near however, the INR looks may struggle to breach the 63.00 level versus USD.

Despite all the doomsayers’ bearish predictions AUD has managed to sustain a solid recovery, helped by the election victory by Tony Abbot and his coalition, and positive data both locally and in China. Additionally a firmer tone to risk appetite has helped the currency provoking some short covering.

Australian jobs data this morning will provide the next test for the AUD but we don’t expect it to get in the way of further short term strength. However, AUD/USD will face some technical resistance around the 0.9440 level. Separately, AUD/NZD lost some ground following a relatively hawkish statement from the RBNZ in which they pointed to the prospects of higher policy rates next year but this is likely to prove to be a temporary set back for the currency pair.

Swiss officials continue to defend the CHF ceiling and show no sign of eliminating it any time soon. We concur as the CHF remains overvalued but the reality is that Swiss economic data has shown some improvement while foreign demand for CHF assets has eased in the wake of improving sentiment towards peripheral Europe as reflected in reduced Swiss banks’ foreign liabilities.

The SNB is also not intervening to hold back CHF gains, with reserves growth flattening out over recent months. Although any reversal of flows from Switzerland will prove sticky the bias for EUR/CHF will be higher. In the near term the currency pair may run into resistance around the top of its recent range around 1.2438.

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