RBA minutes not as dovish as expected

AUD/USD had a big run yesterday underpinned by the developments out of China.

The pair was one of the best performers against the greenback and managed to poke its head above 0.94 through European and US trade. Presumably the AUD was still riding on the momentum from China after those comments from the Third Plenum and strong property prices data. New home prices in China’s four major cities rose the most since January 2011.

The RBA minutes released this morning turned out to be less dovish than what the market was positioned for. While reinforcing its scope to ease  further, the RBA said there is mounting evidence the current monetary policy setting is supporting interest rate sensitive sectors and asset values. While the RBA would want to see a lower AUD, it is clear that this is out of its control.

While the RBA would love to ease to help some struggling sectors, it is also sceptical about creating asset bubbles, particularly in the property market. The RBA said it will continue to gauge effects of policy stimulus on the housing market. AUD/USD reversed from its lows in the 0.935 region and is now trading at around 0.938. We are likely to see more moves in the pair once China opens for trade.

Dollar index loses grip on the 81 handle

We are seeing some confusing moves in the FX space at the moment. On the wires were Fed members Dudley and Plosser who gave some fairly contrasting views. Fed member Dudley said he’s getting more hopeful the US economy is gaining strength as the drag from fiscal policy wanes. Economic growth isn’t yet sufficient to ensure the substantial labour market gains that the Fed has said are a prerequisite to any reduction in its $85 billion in monthly bond purchases.

Meanwhile, Plosser stated the central bank needs to set the final size for QE and end the program once that amount is reached. He also reiterated that the Fed missed an excellent opportunity to start tapering in September. With plenty more Fedspeak on the way, the US dollar is in for some turbulence this week. The US dollar index has already started to give up some ground and lost its grip on the 81 handle, currently trading at around 80.82.

Euro rallies on lower yields

Over in Europe, the single currency got a lift from some developments on the Italy front. The Italian government announced a spending review and an imminent debt cutting privatisation plan. Lower bond yields also helped support the single currency and EUR/USD pushed through 1.35 to a high of 1.354. However, the headline from Carl Icahn towards the end of US trade suggesting companies are overvalued knocked the wind out of risk’s sails and triggered a pullback.

EUR/USD has since pulled back into the 1.35 region and will be in focus later today with some sentiment readings due out. At 21.00 AEDT we get the ZEW economic sentiment for Germany and the region. Any positive signs out of these readings could trigger some buying off the 1.35 region.

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