Well, what a week! I can’t remember seeing such sustained volatility in the markets for a long time. The over-riding theme remains the almighty dollar, currently at 6 year highs against the Loonie and 11 year highs against the Euro. Although everyone knew it was coming the sheer size of yesterday’s ECB QE announcement caused some shock and with concerns about the make-up of the next Greek government will ensure the Euro stays on the defensive for the foreseeable future. Those analysts that are calling for Euro parity with the USD could soon be proved right.

Canadian CPI came out yesterday and was none too pretty (-0.7%), clearly this was in the BoC’s thoughts regarding Wednesday’s surprise rate cut.

Another theory regarding the rate cut is that the BoC was concerned about the Loonie appreciating against other currencies due to the Loonie performing better against the USD than other G7 countries are doing. Either way the Loonie here will keep exporters happy.

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The Swiss National Bank gave us volatility on a historic scale last week as it rocked markets by abandoning the nearly three-year-old policy of supporting the value of the Swiss franc relative to the euro at 1.20. The Swiss franc consequently appreciated sharply across the board, distorting flows and liquidity market-wide.

While this took the market entirely by surprise, the likelihood is that the SNB’s hand would have been forced in the coming months by European Central Bank quantitative easing. The Swiss National Bank would likely not have enough ammunition to maintain euro/Swiss franc at a level of its choosing in the face of the kind of euro weakness that would inevitably result from eurozone QE.

Continued volatility anticipated

Things are unlikely to settle down too much this week either. The ECB’s meeting is the highlight this week, as the market currently expects the unveiling of a quantitative easing package in a bid to stem deflationary pressures in the eurozone.
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Throughout my years on Wall Street and to this day, one question has always bothered me. I have never got a good explanation as to why the price of crude oil and the strength of the USD move in negative correlation. I’ve heard many different arguments but none are foolproof. I’ve even read that there is no causality in the relationship, that’s it’s all in our minds.

The main argument seems to be that as most commodities, including crude, have historically been priced in dollars, if the dollar strengthens, it takes less dollars to buy a barrel of crude, and vice versa, hence the reverse correlation. This seems to make sense, but is it just the dollar that drives the relationship? Can an increase or decrease in the price of oil be the determining factor as well? Many explanations have focused on the economic impact of interest rate changes and the possible associated demand implications they would bring. But what about supply? What if, like today, the supply of oil is plentiful and growing due to geopolitical changes in the production of crude? Will this drive a stronger dollar as well? Or is it the stronger dollar that has pushed the oil price lower?
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Michael Judge, OzForex Corporate Dealer

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With currency markets extremely volatile heading into year end, now could be the perfect time to take steps to protect against future market fluctuations.

Get exchange rate certainty for future international money transfers up to 12 months in advance.

Forward Exchange Contract

If you think the rate is potentially going to move against you between now and when you will convert your funds, you can take out a Forward Exchange Contract (FEC). An FEC allows you to “buy now – pay later”, lock in an exchange rate today, put down a 0-10% deposit and pay the balance when you want to take delivery of the funds.
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There has been continued weakness in commodity prices and stronger than expected US private-sector jobs growth overnight combining to take the Australian dollar through critical support at the 0.8650 mark. The Aussie hit a four year low overnight of 0.8565 as the Greenback strengthened across the board.

Investors are now viewing the next major downside target of 0.8350 followed by the 2010 low of 0.8050. Topside targets now in place at 0.8650 in what’s shaping as a volatile end to the week. Australian unemployment data came in right on expectations at 6.2 per cent providing some respite for the currency.


By Jim Vrondas, OzForex

Currency markets breathed a sigh of relief following the release of the European bank stress tests. After nudging 1.2600 against the greenback last week the euro started the new week on a positive note, pushing above 1.2700 seemingly buoyed by the results.

Of the 130 banks tested across the region 25 failed, with the ECB identifying a gap of 24.2 billion euros in capital required as of the end of 2013. When you distil this down further the results seem more benign with 19 billion already raised this year, the aggregate shortfall is reduced to 6 billion.

The markets will now focus more specifically on the five major banks that need more than 200 million euros and must submit a capital plan, no doubt more headlines will follow.

Stronger European banks no medicine for growth

The credibility of the tests are quite rightly being questioned but on the positive side the result is significant because it emphasises the large capital raising and de-leveraging efforts the banks have undertaken since the last stress tests in 2011. The good news is that bank spreads have tightened making them more stable – for now.

Although the banks are in a stronger financial position the European economy is still not looking that flash. The economic slowdown appears to be spreading from the peripheral to the core with signs of weakness in Germany and fears of a deflationary spiral across the region still evident.

With the ECB only just beginning to print money the banks will no doubt be encouraged to “give” more money away, but there are still question marks around how much of this money will reach the real economy and whether it will positively impact growth.

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By Jim Vrondas, OzForex

It’s a big week for the Australian dollar this week, which will likely see volatility continue. Three RBA officials are due to speak (Assistant Governor Christopher Kent, Deputy Governor Philip Lowe and Governor Glenn Stevens) in addition to monetary policy minutes and inflation

AUD/USD has been trapped between 0.8650 and 89 cents, it’s sitting in the middle of it now but if Stevens and company err on the dovish side then we could test 0.8650 again this week. On the domestic data front we’re expecting both headline and trimmed mean CPI to soften, also weighing on the AUD.

We’re also expecting to hear RBA officials talk to global growth concerns, asset price rises, commodity markets and terms of trade and of course the Aussie dollar.

It’s no coincidence that Glenn Stevens goes last as he may need to clarify any comments made earlier in the week should the market react in an unexpected manner (or too aggressively)

Can the Greenback continue to rise?

Markets ignored US Federal Reserve chair Janet Yellen’s comments about growing inequality in the US and instead focused on consumer sentiment figures. These exceeded expectations, coming in at 86.4 vs 84.3 forecast, the highest reading since July 2007 – pre GFC levels

The US dollar gained ground against the majors and gapped higher against the Yen on the open this week as well. It shows a shift away from the risk aversion trade that saw the Yen strengthen in recent weeks, in my view optimism could linger a little longer but the US is not out of the woods yet.

USD can continue to strengthen but have to be selective – I prefer a long USD position against the Euro still, with USD/JPY too susceptible to shifts in risk sentiment.
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As Australians we love to make jokes at the expense of our Trans-Tasman neighbours, but the Reserve Bank of New Zealand’s management of interest rates in the face of a rising currency is one to be admired. Notwithstanding some of the differences in our two economies, it took some nerve for New Zealand’s central bank to raise rates by 1 per cent earlier this year, despite what was a rising New Zealand dollar at the time.

On March 13, when the RBNZ increased interest rates from 2.5 per cent to 2.75 per cent, it was the first change in over two years. At the time the New Zealand dollar was trading above US86c, around 2 per cent below its all-time high. The bank then subsequently raised the official cash rate three more times to 3.5 per cent, pausing in July when the exchange rate was above US88s. For a small island nation that relies so heavily on its exports, one could call this a rather risky strategy.

It was however a necessary step in order to curb inflationary pressures stemming from a booming housing market which, combined with the introduction of new macro prudential measures, are showing some signs of working. In contrast to the RBA, the RBNZ overlooked the elevated currency and raised rates anyway.
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The signs have been clear for some time: the Aussie dollar should be lower. Commodity prices and iron ore in particular have been in decline for several months already. The Federal Reserve made it clear early in the year that the quantitative easing program would be coming to an end around October and the European economy never really got moving. China was expected to engineer a soft landing with economic growth to come in at around 7.5 per cent, well below the historical levels, which are closer to double digits.

Despite all these signs, the local unit has been resilient. I expected this phenomenon to continue for a few months yet, so have been surprised by the recent price action. Over the last week the big shift lower intensified once support around the US92c level gave way, pushing it below the psychological US90c level.

With the absence of any new news the question many are asking is — why now? Why is the Aussie dollar suddenly reacting to information we already knew?
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It’s a huge week ahead on the data front for the Australian economy. We have building approvals, GDP, retail sales and trade balance all out — can any one of these sway the Aussie dollar one way or another?

GDP is obviously particularly critical as it’s a key measure of economic growth. The market is expecting a pull-back from first quarter +1.1 per cent result to a second quarter reading of +0.4 per cent. This would bring the annualised rate down from 3.5 per cent to 3 per cent, but it is somewhat of a lagging indicator.

The beauty of this week’s releases is that we get a broad reading on the domestic economy, with data providing some insight across a number of fronts. Building approvals are important for construction activity and general confidence in the economy; so too are retail sales and the state of the consumer.

I can’t see any of these moving the Aussie out of this range unless we get a softer-than-expected GDP reading of say 0.2 per cent or less for the quarter — in this scenario we could see a re-test of strong support between 92c and 92.50c.

RBA decision due

Will today’s Reserve Bank of Australia meeting have any impact on the currency this time? Well we know the RBA has been struggling to exert real influence over the Aussie, despite continued attempts to talk it down. It’s not the only one concerned about the local unit’s strength: BIS Shrapnel recently blamed the high dollar for sapping the strength of Australia’s economic recovery.
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As the US dollar rally starts to gather momentum, the euro is approaching its lowest levels in almost a year.

Divergence between the FOMC and ECB interest rate outlooks has been the main driver behind the move that has seen the euro fall 6 per cent since early May. The wedge between the two is only getting wider, with comments from both US Federal Reserve Bank chair Janet Yellen and European Central Bank president Mario Draghi dragging the euro lower over the weekend.

Change of tone in the US

Most of the focus from the Jackson Hole symposium over the weekend has been on remarks made by Janet Yellen. Her comments on the North American economy appear more neutral than hawkish as some have suggested.

They are, however, less dovish as the market has come to expect, and it was a reference to interest rate hikes potentially coming “sooner than market participants currently expect” that sparked a flurry of demand for the greenback. Although the timing on US interest rates is unclear, Yellen’s tone is to be expected, especially from a central bank edging very slowly towards monetary policy tightening.

Economic data takes centre stage

Looking beyond the headlines, it is clear there are still some considerable risks ahead for the US economy. The Fed is looking at much more than just the unemployment rate for a reading on the employment market.
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AUD/EUR Fundamental Outlook
AUD/EUR continued gaining ground in July, gaining another +0.9% overall for the month. The gain in the cross was in part due to asset flows and risk appetite favouring the Aussie over the Euro, the interest rate differential and as both economies reported mixed economic numbers. Economic data out of Australia was on balance better than Eurozone numbers, although weakness was evident in Retail Sales, Building Approvals and the Trade Balance.

Traders will be looking to the ECB rate decision on the 7th, as well as the RBA’s Monetary Policy Meeting Minutes for a better perspective on the direction of the cross. Due to weakness in the Eurozone, the rate differential and improving numbers in Australia, the outlook for the cross is positive in the near and medium terms but neutral longer term.

AUD/EUR Technical Chart Outlook

After making a 0.6314 low in late January, AUD/EUR has since been rallying correctively. The cross made yet another recent high at the 0.7035 level on July 23rd after breaking up out of a mildly declining consolidation range on the 21st.

The outlook for AUD/EUR over the coming month is mildly bullish short term and more bullish in the medium term while the channel top line break is sustained to set up a 0.7780 breakout target.
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AUD/USD Fundamental Outlook
AUD/USD reversed direction in July, dropping -1.4% for the month overall. The decline in the rate was in part due to speculation of tightening by the Federal Reserve, continued dovish RBA monetary policy and mixed economic data from both countries. Australian economic numbers were mostly better than expected or on target in July, with the notable exceptions of Building Approvals, Retail Sales and the Trade Balance, all printing lower than the analyst consensus. In addition, the Australian Unemployment Rate rose a notch to 6% from 5.9%.

Traders will be looking to the RBA’s Monetary Policy Meeting Minutes on the 19th and the FOMC Meeting Minutes on the 20th for a better indication on interest rates and the direction of the exchange rate. Due to continued risk appetite favouring the Greenback, the outlook for the rate is neutral in the near term, lower in the medium term and higher in the long term.

AUD/USD Technical Chart Outlook

After AUD/USD peaked at the 0.9461 level in early April, the rate has since been range trading between that high point and the 0.9202 low of May 1st. Early July saw the rate decline within this range to 0.9378 before then rallying to 0.9474 by the 23rd. The rate subsequently sold off to call as far as the 0.9275 level by July 31st.

Overall, AUD/USD’s medium term outlook gives a neutral to mildly bearish appearance while trading between its 61.8% and 50% Fibonacci retracement levels at 0.9271 and 0.9573 respectively.
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GBP/AUD Fundamental Outlook
GBP/AUD gained fractionally in July, increasing 23 pips or +0.1% overall for the month. The marginal increase in the cross was in part due to asset flows favouring Sterling over the Aussie and with mixed economic numbers out of both countries.

Traders will be watching the BOE rate decision on the 7th, as well as the RBA’s Monetary Policy Meeting Minutes on the 19th for a better idea on the direction of interest rates. Due to the interest rate differential and improving numbers in both countries, the outlook for the cross is neutral near term but otherwise positive.

GBP/AUD Technical Chart Outlook
GBP/AUD rallied to peak at 1.9186 in January, but then came off as far as the 1.7736 level in early April. The cross has since been consolidating within a gently rising range, making highs at the 1.8373 and 1.8364 levels in July.

Overall, the outlook for GBP/AUD looks rather neutral over the coming month until it breaks out of its current gently rising channel to signal an additional move in the direction of the breakout equal to the channel’s width. A downside break is currently preferred.

Full Report – GBP/AUD Outlook August 2014

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After a stint on the sidelines, Reserve Bank of Australia Governor Stevens took the opportunity to resume attempts to talk the Aussie dollar down last week. It was a timely return given the recent surge, but is it enough to send it lower?

It was the first time the RBA governor had been so explicit about the value of the Aussie dollar since he talked of 85 US cents as ‘fair value’ at the end of last year, with some analysts saying the currency could be as much as 12 per cent overvalued. Of course, currencies rarely trade at ‘value’, with this very term being quite subjective and of little significance, anyway.

Australian rates on hold – so what’s new?

What I found most interesting about Stevens’ comments were not necessarily those blatant references to the currency, which the RBA can’t really control anyway, but his views on the economy and interest rates, which of course have a real bearing on the direction the currency trades.

He downplayed any negative impact from the budget, mentioned positive early signs of growth in non-mining activity, said monetary policy is already “very accommodative” with real cash rates “well below normal levels” and that low interest rates are working. These are hardly words of a governor that is actually considering reducing interest rates nearer to zero like Europe, the UK or the US.

All in all, I don’t think we got as much out of Stevens as the market has made out. He confirmed interest rates will remain on hold for an extended period. We knew this anyway.

Stevens needs Yellen

For the RBA to get its way and have the Aussie dollar trade back towards 85 cents, it really needs the greenback to rally. On that front the RBA has bought itself some time.
Stevens needs Yellen to do the heavy lifting — or should I say AUD selling — by providing some timeframe for an adjustment in US interest rates higher post QE tapering. Not likely any time soon.
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The RBA has made a lot of noise about the economic benefits of a lower Australian dollar recently and most businesses involved in the local tourism sector, and exporters in general, agree a lower currency would help them remain competitive.

Some manufacturers might beg to differ however. In theory a lower Aussie dollar can help make locally-manufactured goods more competitively priced compared to imported goods. In reality, things aren’t so simple.

A 10 per cent drop in the Aussie dollar will, eventually, make imported goods more expensive. Crucially though, this will not necessarily translate to a 10 per cent increase in business for the manufacturer. What it can do is actually increase costs by 10 per cent without a noticeable rise on the other side of the ledger.

Some OzForex clients are expressing a preference for a higher Aussie dollar given they import many raw materials that go into the manufacturing process.
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Excited to announce that the BestExchangeRates team and friends (pictured below) will be converging from Australia and the UK to Japan for a field study trip to research all matters Yen AUD/JPY GBP/JPYand oh a few powder runs and Onsen along the way :)

BER Research team taking an onsen
BER research team checking an Onsen’s water temperature

Along the way we will compare using Cash, Bank Credit Cards and Prepaid Multi-currency Travel Cards from Travelex OzForex and QantasCash. Also to be investigated is whether Japan really is a cash only/preferred economy, and the strange and wonderfully inexplicable workings of Japanese ATMs and Toilet Flush mechanisms.
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We first heard rumblings of discontent from leaders of emerging market economies around the middle of last year when it looked as though the US was about to commence tapering quantitative easing. These rumblings are likely to get a whole lot louder this time around though, as the impact of US policy starts to bite these economies hard.

The possibility of a Global Emerging Currency (GEC) crisis has grown over the last week with emerging market currencies around the globe such as the Argentine Peso (-5%), South African Rand (-3.6%) and the Indian Rupee (-2.2%) sold heavily in the last week alone. If it continues, as I think it may, then undoubtedly the Australian economy and the Aussie dollar will also be affected.

What’s different this time around?

What strikes me about the recent price action is that unlike previous emerging currency crises, think Latin America in the ‘80s or Asian Currencies during the late ‘90s, the selling does not appear to be geographically specific. This is not just an issue for South America or some parts of Asia, as we have also seen currencies in Europe like the Russian Rouble (-2.6%) and Turkish Lira (-4%) weaken.

This time around the catalyst is coming from one global external source and as such it has the ability to reach all four corners of the globe.
It’s not all down to US QE tapering though. There are some country specific economic factors (e.g. widening deficits or political uncertainty) contributing to the performance of each economy but the markets seem to be driven more by fear at the moment.
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