The Aussie dollar regained mild composure over the course of US trade on Friday after earlier slipping back to lows of 99.6 US cents throughout the domestic session. After weeks of civil unrest, news of Egyptian President Hosni Mubarak's resignation allowed global markets to return into positive territory as investor welcomed an end to weeks of protests.
Earlier on Friday, the local unit began a south-bound trajectory as RBA Governor Glenn Stevens provided testimony to the House of Representatives economics committee. In his testimony, Governor Stevens provided an outlook of neutrality towards the near-term direction of interest rates, stating I'm fairly content with where we are at the moment. On inflation, Stevens has once again suggested that whilst the fallout of Queensland's floods and Cyclone Yasi would likely see a temporary rise in consumer prices to around 3 percent in the June quarter this 'higher inflation, slower growth' scenario should begin to reverse in the second half of the year and should have largely dissipated by the end of 2011. Nevertheless, this tone of neutrality on interest rates is nothing new - In an address to the parliamentary committee in December, Governor Stevens defended the central bank's decision to pre-empt to curve in November's rate hike, stating current interest rate levels appropriate setting of policy for the period ahead which may not see further tightening come until the middle of next year and maybe a little bit more after that. This testimony of course didn't take into account the economic fall-out from the flood and cyclone devastation; however the recent interest rates and monetary policy statement suggest the central bank remains optimistic, choosing to focus on the medium term outlook rather than concentrate on the short term impact from the natural disasters in Queensland. In essence, the work has been done - the RBA's pre-emptive strike last year has afforded the central bank the time to sit on the interest rate sidelines for the near-term.
The local unit was mostly lower against major counterparts last week, losing over 1 percent against the greenback amid a slowing of retail sales, bittersweet employment data and the aforementioned interest rates conjecture. The week ahead will see little in the way of top tier economic feedback locally - with exception to the RBA minutes from the February meeting due on Tuesday. However, market participants are well truly informed of the state of play from the RBA; hence we do not expect this to have a sustained impact on price activity. The key directive for the local unit this week will likely come from offshore market - thus we expect the local unit to cohere to risk trends from abroad. We may have seen a short-term reprieve in global sentiment on the back of Egyptian President Mubarak's resignation, however the democracy of Egypt still hangs in the balance, hence we could remain a key driver for global sentiment. At the time of writing the Aussie dollar is buying 100.1 US cents.
Recent price activity suggests the greenback continues to cohere to a range of economic drivers. From geopolitical concerns in Egypt to both positive and negative economic feedback from the US, all of the above have at some point proved to be supportive for the greenback in recent history. This distinct lack of uniform is the product of a market without the conviction to neither confirm nor deny the US economy is on the straight and narrow, why? The answers to this lies with the missing link in the US recovery - Jobs. Without this confirmation of a sustained employment recovery, we're likely to see the US dollar to remain at this critical juncture and continue to cohere to this hybrid of influences until economic signpost point to a jobs-based recovery.
The week ahead will see more important economic titbits released to the market with retail sales and CPI data the headline events in a busy week for economic data. Weekly jobless claims to be released on Thursday is also taking on a greater relevance for US dollar price action with last week's drop below the benchmark 400,000 levels proving to be a dollar-positive. Last week jobless claims fell to 383,000 for the week ending Feb 5 surpassing the 410,000 expected. Importantly the minutes of the FOMC January meeting will also be released to the markets and we can expect market participants to scour the minutes for anything vaguely different from the same tepid outlook we've seen in recent correspondence. Likewise, consumer price data due out on Thursday should prove to put some steam behind the US dollar if we should see any significant upturn from estimates. CPI in January is expected to show annual growth of 1.6 percent from a previous 1.5 percent.