Parity looms for the Aussie

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The slow motion sell-off in the Aussie evident over the past few weeks continued overnight, with the 1.02 level finally being taken out. For the first time since the end of June, the AUD is now trading below all of the key long-term moving averages. As we have been intimating for some time, at the very least the AUD was always vulnerable to a period of consolidation, if only because traders had taken such an extreme long position at a time when the global economy was clearly stuttering.

The real clincher over the past few weeks has been the collapse of both iron ore and coal prices, a function of substantially reduced demand from Chinese steel mills. Another contributing factor has been mounting speculation that the RBA will probably cut rates again before too long in response to weaker domestic and international economic conditions. Last night’s second quarter growth figures strengthened the hand of the interest rate doves – GDP rose by just 0.6% in the three months to June.

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Consumers remain reluctant to open their wallets – the household saving ratio rose further, to 9.2% in Q2. And companies are also less inclined to invest, a function of a more uncertain global economic backdrop, lower commodity prices and an expensive currency. If this darkening mood persists, before too long it would not be surprising if parity were tested

Commentary

The euro – looking less assured. Now that traders have returned to their desk, it has been interesting to observe how they appear to be allocating their risk budgets. For the most part, the impulse since Monday has been to short risk, which has meant lower equities, falling high-beta currencies, a higher dollar and a weaker euro. Ahead of tomorrow’s critical ECB meeting, some traders clearly sense that there is significant potential for Mario Draghi to under-deliver in terms of his sovereign debt purchase plan. In particular, the ECB President may well decide to wait for the German Constitutional Court to rule on the legality of the ESM in a week’s time. Technically, the euro ran into substantial offers up above the 1.26 level. Against the backdrop of a steady drip-drip of negative news coming out of Europe, and with the sellers clearly lined up above, traders seem minded to test lower levels and could continue to do so in the near term.

The dual dilemma of the SNB. The Swiss authorities still believe that their currency is over-valued and next week’s quarterly report from the SNB will be worth keeping an eye on. But a change in the 1.20 floor on EUR/CHF looks unlikely at this point in time. The SNB is clearly having a battle to maintain the current level and adjusting it could prove increasingly costly, especially as the impact of this increased liquidity seeps into the economy. It’s no coincidence that house price increases are at a near three-year high as liquidity remains ample. It’s more likely that the SNB will announce measures to curtail the fall-out from the strong franc, rather than attempt to quell its strength.

Late boost for sterling. The August PMI services data was released early yesterday (it was due this morning) and gave the pound a modest lift into the European close as the headline data proved to be firmer than expected at 53.7 (from prior 51.0). This comes after a recent run of fairly disappointing data in the UK which has once again called into question the chancellor’s fiscal strategy and lack of growth agenda, which the government is attempting to tackle this week.  EUR/GBP remains within the recent range though, the move from the lows of late July leaving the cross in a fairly tight trading range, even more so over the past week.

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