A dramatic turn-around in the Aussie overnight as the RBA moved to a more neutral bias in their statement following their rate-setting meeting. At the end of last year, the RBA described the Aussie as “uncomfortably high” in their statement and they were very clear in their desire to see it lower in order to support a re-balancing of the economy. So today’s statement is a big shift, merely referring to the decline in the exchange rate seen to date and its impact on the economy. Recall that the RBA Governor Stevens was also keen late last year to talk down the currency. The change in tone has seen the Aussie rise 1.5 cents on AUDUSD, touching the 0.8900 level in late Asia trade. In one fell swoop the market has lost one of its favoured bear plays.
The Aussie aside, the tone of the FX market remains one of caution. The slump in the US ISM manufacturing data yesterday undermined the positive sentiment surrounding the dollar over the past two weeks. Nevertheless, underlying resilience remains in place, not least because of the fragility in emerging markets. For today, the data is second tier and should not impact, with the focus really on the ADP number tomorrow ahead of Friday’s payrolls report. The market is anticipating a bounce from the weather related slowdown seen in the December numbers. If this is not seen then FX markets will doubt if the Fed can continue with its measured pace of tapering, taking us back to the “will they, won’t they” dynamic that was prevalent in the second half of last year. Finally, Japanese stocks once again weaker overnight, but there has been limited reaction on the yen, suggesting that the safe haven tendencies that were strong during January may be fading a touch in February.
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