Euro and Aud/usd outlook

since late-July, much of the focus in capital markets has been on two main themes: will the European Central Bank use its balance sheet to help stem the Euro-zone crisis; and will the Federal Reserve ease its monetary policy further to help a struggling US economy enraged by a disjointed fiscal program. On September 6 and then again on September 13, both questions were answered: yes and yes.

Thus, while the ECB and the Fed have set off on the dangerous path unlimited easing, risk markets have been rallying sharply and the US Dollar has fallen back quite substantially. But this week, there are no Euro-zone- or United States-specific data releases that are of the gravitas that the ECB and the Fed have had. Thus, our focus lies elsewhere: how the British economy is faring in the wake of the London Olympics; and how strong the impact of the Chinese slowdown is. We thus turn to several data releases out of Australia, New Zealand, and the United Kingdom, while keeping an eye on the Bank of Japan Rate Decision.

09/18 Tuesday // 01:30 GMT: AUD Reserve Bank of Australia September Meeting Minutes

At their September meeting, the Reserve Bank of Australia kept its main interest rate on hold at 3.50%, the highest main rate among the developed economies covered by DailyFX Research. However, especially over the past six-months, the Chinese economy has slowed sharper than anticipated, which has damaged future growth prospects for the Australian economy.

Why does this relationship matter? China is Australia’s largest trading partner, and thus, the Australian Dollar is very sensitive to the Chinese growth picture. A strong indicator for weakening Chinese growth has been the price of Iron Ore – Australia’s main commodity export – which has plummeted in recent months from $150.20/metric ton to as low as $86.20/metric ton on September 6 (-42.61%!). The evidence is clear – and our long-held view of a “hard landing” in China is being vindicated (for now).

In the policy statement accompanying the RBA’s Rate Decision, Governor Glenn Stevens issued a more optimistic tone than anticipated, which should be reflected in the Minutes. “Growth has been running close to trend, led by very large increases in capital spending in the resources sector,” he said. “Labor market data have shown moderate employment growth, even with job shedding in some industries, and the rate of unemployment has thus far remained low.” Governor Stevens also noted that domestic consumption was “quite firm” while acknowledging that the Chinese growth picture was worsening. In all, it’s unlikely that the Minutes deviate far from the policy statement. The key pairs to watch are AUDJPY and AUDUSD.