Risk assets staged a recovery late in the session, with AUD, NZD and EUR regaining some ground against the US dollar. Even gold managed to hold its ground, after falling the most in 30 years over a two-day period. XAUUSD held around 1350 despite CME increasing margin requirements for gold, silver and other precious metals. A lack of market moving data resulted in some profit taking on short positions in commodity currencies.
RBA minutes prove to be a non-event
It briefly looked like the RBA was going to put a damper on a rebound in the Aussie with the release of its April meeting minutes. The bank retained its easing bias, reiterating that the inflation outlook provides scope for lower rates if needed. At the moment however, the RBA appears content to wait while its assess the impact that prior rate cuts will have on the real economy, given recent data suggested that interest-sensitive parts of the economy were starting to benefit from prior policy loosening. However, the board noted that there are numerous factors weighing on the economy, including a high exchange rate, tight fiscal policy and waning growth in mining investment. At the same time, global economic conditions are mixed as the US continues to grow at a modest pace but the outlook for Europe looks bleak.
Looking forward, the biggest threat to growth is from an anticipated peak in mining investment later this year. If non-mining parts of the economy can’t take up the slack, then the RBA may have to step-in to stimulate demand. The board noted that non-mining investment remains subdued but is likely to pick up later in the year, with dwelling investment rising and household consumption improving.
Overall, the minutes were largely a non-event for the market, as expected. The bank didn’t introduce any new significant factors in its rates equation and didn’t deviate very far from prior statements. The possibility of further rate cuts however, limited gains for the aussie when compared to the euro and the kiwi. In fact, we favour more downside for AUDNZD in the medium-term – see: Fundamental Update: NZ CPI
NZDUSD is currently testing a resistance zone around 0.8490 (38.2% retracement level from 0.8675 high), after falling below 0.8400 overnight. EURUSD is stubbornly holding above 1.3000. Granted the recent FX sell-off was focused on commodity currencies on the back of China’s GDP miss, yet fundamental weakness in the Eurozone may weigh on the pair down the track, thus we look to short into rallies in the common currency. In that regard we will be closely watching German economic sentiment data out at around 09:00GMT.