FX Market Summary 07-30-2013: Australian dollar weakens sharply

The Australian dollar was a big mover during the Asian session on Tuesday. There was weaker than expected economic data as building approvals fell 6.9% for July following a revised 4.3% decline previously which undermined confidence in the economy. There was further major damage following Reserve Bank Governor Stevens’ speech as he stated that recent inflation developments still allowed for the possibility of lower interest rates. He also stated that it would not be surprising if the Australian currency weakened further. This combination of comments increased speculation over a rate cut next week and also triggered an AUD/USD slide to two-week lows near 0.9050.

Japanese data was very mixed with lower than expected unemployment offset by a decline in household spending and industrial production. There were renewed expectations that the Bank of Japan might need an even more aggressive policy to combat weak growth and the yen initially came under pressure. The dollar found it difficult to take full advantage, but did move back above the 98 level.

Spanish second-quarter GDP was in line with Bank of Spain estimates at -0.1% while there was an increase in German consumer confidence to a six-year high. The overall Euro impact was limited as the Bank of Spain had already released its GDP estimate last week.

Overall European trading conditions were again subdued with narrow ranges dominating. There was a further attempt to push EUR/USD above the 1.33 resistance area at the US open, but the attempt again met increased selling.

The latest US consumer confidence data was slightly weaker than expected with a decline to 80.3 for July from 82.1 previously. Confidence, however, was still near a six-year high which offered underlying reassurance. There was also an increase in the current conditions component which suggests that immediate conditions are favourable and confidence in the labour market improved. The latest case-Shiller house-price index also recorded a 12.2% annual increase.

President Obama was due to make a speech on business taxation and the economy later in the US session. There were some rumours that he would announce a one-off levy on US foreign earnings held overseas which could trigger a selling of overseas assets and boost the dollar. These rumours contributed to a firmer US currency tone and EUR/USD retreated back to the 1.3240 area.

Sterling was generally on the defensive during the day with caution ahead of Thursday’s Bank of England policy meeting given the possibility of dovish forward guidance. There was also month-end Sterling selling against the Euro as EUR/GBP climbed to a high near 0.8690. In this environment, GBP/USD dipped sharply to lows below 1.5250 during the New York session.

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