The Japanese Yen, the Swiss Franc, and the US Dollar – the “safe haven” bloc – are among the top performers for the second day in a row as global risk aversion gathers pace once more ahead of several significant events that will reverberate across the FX landscape. Consequently, high beta and risk-correlated assets such as the Australian Dollar are getting slammed today; the Aussie has lost over -2% to the US Dollar since Friday’s close.
The impetus for today’s slide in the Aussie comes on the back of the worst Building Approvals since August 2012, and the sharp downturn seen from April-June (+35.0% to -13.0% y/y) is very reminiscent of housing data seen at the end of 2008. While there was a 44% chance of a 25-bps rate cut at the end of the July meeting week, there is now a 92% of a 25-bps rate cut for the Reserve Bank of Australia meeting this coming Tuesday.
In the event of a rate cut next week, I still believe that the RBA will cut rates one more time in 2013, to bring the main rate to 2.00%. Accordingly, the Australian Dollar selloff might not be finished despite the consolidation seen in the AUDUSD the past month-plus.
Elsewhere, the Euro’s case for a strong week was bolstered as the Spanish GDP (2Q A) report beat expectations slightly, affirming the mild uptick in data seen in May and June. This week, the Euro could be a top performer if the cards fall right; next up is the ECB on Thursday.
Taking a look at European credit, mixed performance on the short-end and improvement on the long-end of peripheral yield curves has the Euro supported only slightly on the day. The Italian 2-year note yield has decreased to 1.593% (+0.5-bps) while the Spanish 2-year note yield has decreased to 1.900% (-0.1-bps). Similarly, the Italian 10-year note yield has decreased to 4.397% (-5.0-bps) while the Spanish 10-year note yield has decreased to 4.641% (-2.5-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 09:30 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.35% (+0.24%prior 5-days)
By Christopher Vecchio, Currency Analyst