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Comments by Fed member Richard Fisher suggesting markets had overreacted to the Fed’s tapering off announcement from last week helped markets pare losses as US treasury yields stabilised and the USD pared gains. Dudley and Kocherlakota, who are known doves, were also on the wires arguing for a continuation of QE. USD index made a three week high and then retreated from that on the back of the comments. The DXY traded to a high of 82.84 and looked set to head back towards the 83 level but the gains reversed sending it down to 82.50. However, markets in the US still finished lower as China concerns continue to weigh.
In a sign that sentiment hasn’t really changed, moves in the FX space were limited with AUD/USD sidelined at around 0.925 and EUR/USD at around 1.312. The USD lost a little bit of ground on the back of Fischer’s comments but risk just failed to gain traction due to China’s woes. Yesterday China was hit by downgrades to growth forecasts by Goldman Sachs and UBS. Analysts are now looking at China GDP growth between 7%-7.5% over the next couple of years. This is a massive concern for our local currency particularly as it has an adverse impact on the commodities space. Gold, copper, iron ore and nickel are also under significant pressure and this is weighing on the local materials space.
Yesterday we highlighted that AUD/USD is in a fairly tight range and the pair managed to edge higher but was contained at the 0.93 level. Should the turmoil in China continue today, we could see AUD/USD trade below $0.92. We feel this level is near term support for the pair.
EUR/USD recovered from lows in the 1.306 region to around 1.312 where it is currently sidelined. USD/JPY dropped back as the USD lost ground but has since roared back in Asia and is heading back towards 98. While data is limited in Asia and Europe today, focus is likely to be primarily on the greenback with several data releases on the calendar. The data kicks off with durable goods orders followed by the Case-Shiller home price index, new home sales and consumer confidence. US Treasury Secretary Jack Lew and the Richmond Fed will also be on the wires.