Forex Market Update

GBP gets the boot on weak production numbers. European session otherwise quiet after sharp moves in Asia on surprise RBA hike.

USD pushed back lower on carry trade theme, renewed jump in equities.

MAJOR HEADLINES – PREVIOUS SESSION

• Australia Aug. Trade Balance out at -1524M vs. -900M expected and -1783M in Jul.
• Australia RBA raised rates 25 bps to 3.25% vs. no change expected
• Switzerland Sep. CPI out at 0.0% MoM vs. 0.1% expected
• UK Sep. Halifax House Prices rose 1.6% MoM vs. 0.6% expected
• UK Aug. Industrial Production fell -2.5% MoM vs. +0.2% expected
• UK Aug. Manufacturing Production fell -1.9% vs. +0.3% expected
• Canada Aug. Building Permits out at 7.2% MoM vs. 5.0% expected

---

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• US Treasury's Levy to testify (1330)
• Canada Sep. Ivey Purchasing Managers Index (1400)
• US Weekly API Crude Oil and Product Inventories (2030)
• US Weekly ABC Consumer Confidence (2100)
• Australia Sep. AiG Performance of Construction Index (2230)
• UK Sep. Nationwide Consumer Confidence (2301)
• UK Sep. BRC Shop Price Index (2301)
• Australia Aug. Home Loans (0030)
• US Fed's Hoenig to Speak (0145)

Market Comments:
RBA surprise hike
The RBA surprised markets with a move overnight, becoming the first of the G-20 banks to hike interest rates. And even thought the market was increasingly leaning toward a hike, there was more than enough surprise to pull AUD significantly higher vs. the broader market. This and renewed risk appetite brought AUDUSD within shouting distance of 0.8900, a new high since late last summer. The 2-year interest rate differentials for the US and Australia are still a tad below the highest level from September, however, when AUDUSD was trading a bit lower, so the direction for AUDUSD after the immediate kneejerk here will still depend on a further widening of the differential and continued robust risk appetite. In other words, it's all priced in at the moment.

The RBA explained its decision as a result of an economy performing more strongly than expected and an inflation outlook in which "inflation will not fall as far as earlier thought." The RBA also mentioned that Chinese growth has been very strong. On the strength in the Aussie currency, the RBA simply noted that the currency was strong and that its strength was "considered". Lack of concern on the currency was also a green light for the Aussie bulls. Barring any exogenous shocks, the RBA is likely to hike at its next two meetings as well.
Sterling hits the skids
The pound hit the skids once again on awful production data, particularly concerning since the very weak pound (which is scraping very long term lows against an evenly weighted basket of the remainder of the G-10 currencies). GBP will continue to trade like a carry trade funding currency, it seems and the rejection at 1.6000 looked interesting in GBPUSD, with the recent 1.5770 low for the cycle the last local line of support. In EURGBP, the 0.9300 are is the key local resistance.
Anti-dollar conspiracy?
The weak USD action overnight in Asia was aggravated by a story in the UK's Independent, which described a plot by Gulf Arab states, China and others to move oil pricing away from the dollar and possibly to a basket of currencies. The timing of the article with the RBA's actions and gold stretching higher gave it more impact, even if the Saudi central bank governor later emerged to flat out deny the allegations in the article. Really, such a "plot" is necessary and would be better for the long run anyway, as it would help to iron out global imbalances caused by USD pegging. And even if the story was true, it discussed a timeline for such a move stretching to 2018.
Latvia and SEK (again)
Interesting for the Swedish krone at the moment are the goings on in Latvia, which may be moving toward a meltdown according to sources and some of their latest actions, as they refuse to go all out to introduce austerity in the state's budget. The broader liquidity and risk picture suggests that the international community might let this one go now, since the contagion risk is lower now that so many believe things are headed the right way. This will inflict significant costs for Sweden, however, and explains why the SEK rally has derailed in recent days. Stay tuned there as the time line may be rather compressed and EURSEK is closing in on an interesting resistance area at 10.37.
Looking ahead
Watch the Canada Ivey PMI out shortly to see if CAD can also break to new highs vs. the USD. CAD is a bit like a weaker flavor of the carry trade. Canada has the commodity credentials of the Aussie or the like, but not the hawkish central bank expectations, so it has been slower to respond to the risk rally. Also watch out for tonight's employment report from Australia - did the RBA get a sneak peek? Would certainly be interesting contrast if the report is as weak as it was last month.
Chart: AUDUSD
The performance in AUDUSD looks very strong, but the expanding triangle formation we are seeing is theoretically a bearish one - though we would certainly wait for a break of the lower bound of the formation for confirmation.