Australian Dollar to Remain Fragile vs EUR, USD and GBP as US Economic Confidence Grows

The Aus dollar has recovered lost ground as we head towards the end of what has been a torrid week.

Losses seen mid-week follow the hefty declines witnessed on the first trading day of the month suggesting this will ultimately be remembered as a poor week for the NZD and AUD.

Good economic data out of the United States on Wednesday drove US bond yields higher in anticipation of US Federal Reserve hikes - the rise eats into the superior yield position long enjoyed by both Australia and New Zealand.

As a result the flow of funds back to the United States appears to be in full swing. The higher US dollar is also suppressing commodity prices, a negative for the commodity-focussed economies of Australia and New Zealand. As such the outlook remains poor for the two currencies - good news for Australian and New Zealand exporters.

A look at the Australian and New Zealand dollar exchange rate conversions today shows recent losses have been stemmed and consolidation has set in.

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P.S: The above quotes are taken from the global FX spot market. It must be noted that your bank will widen the spread on the above numbers when passing on their retail rate to customers. An independent FX provider will however guarantee to undercut the bank's offer thus delivering you more forex. Please see more on this here.

RBA Prompts Aus Dollar Consolidation

The Aussie dollar is firm heading intot the weekend following the RBA's quarterly economic update.

No major surprises were announced by the RBA.

Felicity Emmett at ANZ Research:

“Underlying inflation forecasts were revised slightly higher from mid-2015 onwards based on the depreciation in the exchange rate.”

Japan threatens to keep the AUD elevated as the ‘carry trade’ effect continues. This is where investors borrow cheap money, such as the yen, and invest it in areas offering higher interest rate yields - such as Australia. This pushes up the value of the currency.

“The RBA continues to characterise the AUD as remaining above most estimates of fundamental value, but noted that a potential increase in capital flows from Japan could provide support for the exchange rate,” says Emmett.

US Data Drives Down AUD, NZD

The latest ADP employment data shows US private employers added 230,000 jobs in October, the most since June and exceeding economists' expectations.

Economists surveyed by Reuters had forecast the ADP National Employment Report would show a gain of 220,000 jobs.

"Higher U.S. yields, falling commodity prices and elevated geopolitical uncertainty undermined the appeal of the higher yielding AUD and NZD. The Aussie, shed nearly one and a half percent to hit a new four-year low overnight," says Omer Esiner at Commonwealth Foreign Exchange.

Pound to Australian Dollar: Catches a Break

Helping AUD sentiment earlier in the week were Australian retail sales which jumped 1.2% in September, easily topping forecasts of a 0.4% increase, boding better for underlying economic strength.

"Still, Aussie sentiment is likely to struggle for the foreseeable future following steading signs of sluggishness in key trade partner China who reported the slowest manufacturing growth in five months in October, another sign of moderation in the world’s No. 2 economy," says Manimbo.

Australian Central Bank Keeps a Steady Hand on the Steering Wheel

In Australia, as widely expected, the RBA left the cash rate unchanged at a record low at 2.50% and a lack of surprises gave reason for markets to strike a more positive tone towards the Aussie.

Overall the press release was almost identical to last month’s statement.

The RBA reiterated its neutral bias and re-stated its forward guidance on interest rates.

The central banks stated that “on present indications, the most prudent course is likely to be a period of stability in interest rates”.

As for the foreign exchange rate the tone was slightly tougher stating “the Australian dollar remains above most estimates of its fundamental value, particularly given the further declines in key commodity prices in recent months”.

Discussions on the volatile labour market data was eliminated.

"It has been over a year since the RBA has made any adjustment to the cash rate and currently outlasting most early estimates for the first rate hike. The RBA (along with Bank regulators) has made adjustments to help cool the housing market yet there is a growing risk that holding rates at record low of 2.50% could reignite house inflation," says Peter Rosenstreich at Swissquote Forex Services.

Elsewhere, total number of Australians employed in September was down 24,400 and the jobless rate was 6.2% vs.6.1% prior read.

The AUD strengthened marginally on the decision but upside should be limited ahead of the ECB decision due to broader tactical trading strategies.

New Zealand Dollar Saved by Dairy Product Data

New Zealand ANZ commodity prices dropped 0.8% in October following a 1.3% drop the previous month.

However, dairy products, rose marginally. Fonterra auction results are also due tonight.

New Zealand and Australian Dollars Forecast to Slip vs the USD

Elsewhere, TD Securities have issued their latest forecasts for the Aus and NZ dollars against the USD:

"We look for both the AUD and NZD to slip against the USD going forward on stable domestic monetary policy, a shared aversion to currency appreciation by both central banks, and softer commodity prices as Chinese demand slows.

"We note, however, that the "seasonal" pattern of USD weakness has its counterparts in the antipodean currencies, which usually perform relatively well through the year-end period."