Risk Currencies Supported on Short Covering; QE Back in the Spotlight?

By Chris Gore | June 04 2012 7:33 PM

The Australian dollar managed to squeeze out moderate gains overnight despite continued negativity from both sides of the Atlantic. Given the latest round of soft data from the U.S, we're seeing quantitative easing speculation return to the market, given the reemergence of economic concerns which has promoted US dollar weakness across risk counterparts. In part, we can also attribute gains across risk currencies to a short covering rally rather than a material shift in sentiment. Adding to Friday's less than inspiring jobs and manufacturing data, U.S factory orders slumped 0.6 percent in April led by a 2.1 percent drop in core capital goods. Economists had anticipated a moderate rise of 0.2 percent.

REUTERS

Investors will also be watching the release of 1Q GDP on Friday which is expected to see annual growth of 2.5 percent from a previous 3 percent. Core personal expenditure and University of Michigan confidence data will wrap up a huge week in terms of event risk.

Sponsorship Link

The Aussie dollar has returned above the 97-handle once after falling to 8-month lows on Friday. The local unit rose to highs of 97.47 US cents alongside the Euro which is currently testing $US1.25-figure despite noise from ratings agency S&P saying Greece as a one-in-three chance of leaving the Euro-Zone. Underpinning Euro strength is also speculation European leaders will take further measures to bolster confidence with investors looking to an emergency G-7 meeting scheduled for this evening.

Local markets are bracing for a big day of event risk to govern Aussie dollar movements with the RBA Rate decision headlining at 14:30 AEST. In short, markets consider a 0.25 percent cut a certainty, with growing calls for a second consecutive 0.50 percent cut. With this easing bias in place, the Australian dollar is at a prime vantage point to make a short and sharp shift to the upside should the RBA fail to deliver. While it's clear subdued inflationary pressures have afforded the RBA ample breathing space to ease monetary policy, the question remains does the board consider deterioration so great a 50bps cut is required to step ahead of the curve? Whatever the result, Stevens and Co have a lot to mull over and Tuesday's policy decision at the very least promises to induce significant volatility from the local unit. Earlier this morning we have the AIG performance of services index, current account balance and net exports of GDP. HSBC will also release PMI services data this afternoon. At the time of writing the Aussie dollar is buying 97.25 US cents.