A$ slides as investors rein in stimulus expectations

Despite moderate support across U.S equities, the Australian dollar trajectory turned sharply south on Friday with the AUDUSD pair crossing the downside of various points of support, before bottoming out just above 104-figure.  The very same factors which have underpinned recent gains are now working against Aussie dollar, as market participants discount the chances of further Fed stimulus. The local unit was the second-worst performer of the major's, losing around 1.5 percent over the week, behind the Japanese Yen which lost 1.64 percent against the in-form greenback.  A slightly better-than-expected consumer confidence report from the University of Michigan and a stronger leading index confirmed the trend of U.S dollar dominance, while U.S equity markets finished the week in positive territory, representing six consecutive weeks of gains from the DOW and S&P500.

The highlight of the local week ahead will be the RBA minutes for the August 7 policy meeting which saw Governor Stevens and Co hold benchmark rates steady at 3.5 percent. While acknowledging the significant challenges from the euro region amid a subdued growth global growth outlook, on balance, the statement painted a fairly positive picture. On China, the statement noted growth has moderated to a more sustainable pace, but "does not appear to be slowing further." Local inflation is expected to be in line with expectations and business credit has recorded its strongest growth in several years. On the Australian dollar, the statement simply highlighted the local unit has remained resilient despite a marked decline in the terms of trade and weaker global growth outlook. This point was further emphasised in the later release of the RBA Statement on Monetary Policy which acknowledged the role a strong currency has played in dampening domestic growth and weighing on non-resource industries and employment. The bank also highlighted the resilience of the dollar despite a marked deterioration in global growth expectations, while attributing strength to foreign demand for the relative safety of highly rated Australian dollar securities. In short, the RBA considers a high exchange rate poses "important risks" to the domestic economy. This represents a material shift in language from previous RBA commentary, with the emphasis now on the disparity between fundamental drivers and Aussie dollar demand. Also in focus this week will be the release of the HSBC China flash manufacturing PMI on Thursday with an appearance from RBA Governor Glenn Stevens before the House of Representatives Standing committee on Friday.

Euro short-covering negates greenback dominance

The Euro escaped largely unscathed against the greenback with the pair finishing a moderate 0.36 percent higher over the week. Fresh from vacation, last week German Chancellor Angel Merkel echoed recent comments from ECB President Mario Draghi, saying "we feel committed to do everything we can in order to maintain the common currency." In a further display of solidarity, Merkel also said the recent European Central Bank decision to reboot peripheral bond-buying operations on a conditional basis is "completely in line with what we've said all along."  It's appears this unified front has given investors ample reason to unwind short-side exposure which has provided the euro relative stability in comparison to its risk currency counterparts. The euro forged a 3-week high against the Aussie dollar on Friday and 6-week highs against the Japanese Yen amid extremely light liquidity given the August holiday period. Germany will provide the bulk of euro region macro releases this week with Thursday's final revision of second-quarter GDP to take centre stage. Also of interest will be the health of manufacturing and service sectors with both Germany and the Euro-Zone PMI releases. Euro-group President Jean-Claude Juncker will meet Greek Prime Minister Antonis Samara in Athens this week, amid speculation Greece will seek more time to implement agreed austerity measures as part of their bailout conditions. With Europeans slowly returning from there August holiday period, we may see liquidity begin returning to the market which may also bring increased headline risk as politicians and central bankers return to their posts over the next fortnight.

Stronger U.S data signals dollar reversal; Fed minutes on tap

Apart from the usual headline risk resonating from the Euro region, stimulus expectations will remain a key directive this week, with Wednesday's release of the Fed minutes from the August 1st meeting sure to attract the usual level of stimulus related conjecture ahead of the Jackson Hole summit at the end of the month. A speech by Atlanta Fed President Dennis Lockhart and current FOMC voting member will also be closely watched on Tuesday as markets attempt to gather intelligence over how individual members see the recent bright spot across data points. Economic news this will see the focus turn to data on the health of the U.S housing sector with new and existing home sales alongside corporate earnings from tech heavyweights Dell and HP. Manufacturing data will take the stage later in the week with Markit PMI and Durable goods orders on the docket.

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