The USD is likely to find it difficult to make progress ahead of potential further easing steps by the Fed FOMC. Although more quantitative easing is not likely at this stage there will be some hesitancy to increase USD positions given that it cannot entirely be ruled out. Rather than quantitative easing (QE) it is more likely that the Fed announces an “Operation Twist” type operation which unlike QE would not result in an increase in the Fed’s balance sheet but extend the duration of its portfolio, limiting any damage to the USD.
If the Fed does not implement further QE the USD will be in a good position to extend gains over the rest of the week. Meanwhile, today’s existing home sales data for August will have little influence on FX markets, with a small expected gain unlikely to make up for the drop in the previous month.
News that banks borrowed EUR 201 billion from the European Central Bank (ECB), a significant increase from the EUR 164 billion in the previous week failed to dent the EUR even though it appeared to indicate increased money market tensions. The EUR actually strengthened, helped by a reasonable result to Spain’s T-bill auction, a less negative than expected outcome to the German September ZEW investor confidence survey and news that Greece paid a EUR 769 million coupon payment.
Attention today will continue to focus on progress on Greece’s next loan tranche which appears to moving in the right direction. A positive announcement, with Greece acquiescing to the Troika’s demands to implement current and additional austerity measures will bode well for the EUR, but the relief is set to be short-lived.
AUD has been through some volatile trading recently. Yesterday the currency found some support after hitting a low around 1.0149 from a less dovish than expected set of Reserve Bank of Australia (RBA) meeting minutes, with the Bank holding a more cautious view on inflation than the market had priced in. Although the AUD is clearly reactive to higher risk aversion, it is less sensitive than some other risk currencies suggesting that even in the current environment of elevated risk aversion, AUD retain some, albeit limited resilience.
I continue to prefer playing long AUD positions versus NZD and data overnight has provided support to this view as NZ’s current account deficit widened more than expected in Q2 to NZD 0.92 billion. AUD/NZD appears to be basing around current levels above 1.2400 and a push higher is likely.