RBA Becomes Less Hawkish, US$ Unchanged
The US$ was marginally weaker overnight on thin trading ahead of the European Central Bank and Bank of England meetings Thursday. The greenback has given back a small portion of its two-week rally, but remains on firm footing. Without economic news this morning, the US$ will likely take its cue from the movement of equity and commodity markets. Oil surged to a new, all-time high overnight, trading above $120 per barrel. As disruptions in supply continue to concern the market, the price seems to have no ceiling. As most of the economy is consumer-driven, the high prices of oil might continue to erode confidence in the economy. The longer that oil stays at these elevated levels, the harder it will be for the U.S. economy to post a significant rebound from its current slowdown. Additionally, news this morning showed that Fannie Mae posted another greater-than-expected loss. Fannie stated that it lost $2.57 per share, compared with expectations of a loss of $1.48 per share. Fannie will also cut its dividend payment and try to issue new common stock to raise new capital. This news has weighed on equity markets, as the DJIA and S&P 500 are indicated down 0.5%.
The euro was slightly stronger overnight as analysts continue to await the ECB’s meeting on Thursday. Though there is a consensus that the ECB will not change interest rates, expectations for the meeting vary widely. There are some who expect the ECB to change its rhetoric on inflation and growth. Thus far, the ECB has been consistent on stating that its concerns continue to be price stability, suggesting that there is no room within the Bank’s forecast to lower interest rates should growth slow. However, the market has begun to expect the European economy to slow significantly at the end of this year, forcing the Bank to move either in the last quarter of this year or first quarter of next year. If the ECB changes its rhetoric, even slightly, the euro stands to lose a significant ground. On the other hand, should the Bank continue to confirm that its main concern continues to be inflation, the euro will likely push to the higher edge of its recent range.
The yen is stronger overnight following the disappointing news from Fannie Mae and potential for U.S. equity markets to push lower. Though some confidence has been restored to the market, investors remain concerned with moving into the carry trade, which would cause the yen to weaken. As equity markets remain in a consolidating range, the yen is likely to move in the same range, mirroring closely equities’ movements.
The British pound was flat overnight, despite weaker than expected data on the services sector. PMI services was released to show a reading of 50.4 versus expectations of 51.7. With the Bank of England meeting this week, the pound will likely struggle to make any gains against the US$. Though the BOE is expected to leave interest rates steady, its position as the most proactive central bank in the world creates anxiety among investors in the days leading up to the meeting.
The Royal Bank of Australia met last night and kept interest rates unchanged at a 12-year high. After raising rates in February and March of this year, the RBA indicated that it was less concerned with inflation in the short term. This should help to tamper gains that the Australian dollar has made during its historic rise against the US$.
