NEWS / Foreign Exchange

Australian Dollar Recovers From Sell-off, Majors Wander Aimlessly

Talking Points

??? Australian Dollar: RBA stays pat but Aussies maintains bid
??? Euro: PMI Services in line, Retail rebounds
??? British Pound: PMI Services in line, BRC shows some retail slowdown
??? US Dollar: ADP on tap

Australian Dollar Recovers From Sell-off, Majors Wander Aimlessly

Generally a quiet night for majors in Asian and European sessions as the attention of the currency market was centered on the Australian Dollar. The Aussie first swooned for 80 points after RBA announced that it would hold rates steady at 6.25% and then spent most of the night recovering all of its losses as traders bet that the central bank simply delayed the rate hike until the next meeting of the Monetary Policy Committee in May. The Australian economy has been red hot as Retail Sales, Housing and Trade Balance all beat expectations in the month of March, leading most traders to conclude that RBA will forced to raise rates at least another 25bp to 6.50% in the near future. One possible reason for the central bankers reticence to act today may have been the RBA??™s desire to see the latest inflation data which is due at the end of April. Furthermore, the near 5% rise in the currency against the greenback in the past month may have acted as natural tightening mechanism, making Australian assets more expensive and thus saving the central bank the trouble of an additional rate hike at the present time.

Nevertheless, the market is convinced that RBA will raise rates in May, with most players in Asia and Europe now willing to buy the untion every dip. Still with the currency having come so far so fast the question that most traders should ask themselves is how much upside is there left in the Aussie? Even if the inflation readings prove friendly to the bull??™s case, with the rate hike already factored into the price, the Aussie could be in for nasty tumble if for some reason RBA decides to remain stationary.

Meanwhile in Europe, the EZ PMI services data printed essentially in line at 57.4 vs. 57.5 expected as the Italian component was the only report to show any serious deterioration. More importantly German Factory orders jumped 3.9% vs. 0.5% projected as demand for exports especially to China continued to fuel production. The surprisingly strong rise bodes well for another rate hike by the ECB in May, as the central banks restrictive monetary policy has clearly not hurt growth in the region, providing the monetary authorities with greater political leeway to tighten further. The EURUSD strengthened into the North American open, trading at 1.3360 but the pair??™s near term direction is likely to be determined by US economic news. With both ADP and US ISM non Manufacturing report on tap, currency traders will want to see if there is any weakness in the US data before pushing the pair any higher to test the 1.3400 level reached last Friday.