A number mysterious price movements has occured since the beginning of this week, deviated from fundamental expectation norm.

A number mysterious price movements has occured since the beginning of this week, deviated from fundamental expectation norm. These movements included bullish AUD following RBA decision to cut rates, bullish Euro although recent development on Greece Debt negotiation showed increasingly difficult talk, and bullish Sterling ahead of tomorrow's election. These movements can be attributed to the possibility of Fed rate hike postponement, but it's clear that they present considerably high risk to the current trend. 

risiko

 

RBA Failure To Depreciate AUD

In accordance with expectations, Reserve Bank of Australia yesterday (6/5) cut rates at 25 b.p. to 2 percent on account of unsatisfactory inflation outlook and with the aime to boost household demands. Soon after the announcement, Australian Dollar dropped, but a while later it shot up to near 0.80. Why? 

First, although RBA cut rates, but their statement sound more 'hawkish' than 'dovish'. In their statement, RBA wrote, In Australia, the available information suggests improved trends in household demand over the past six months and stronger growth in employment. Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year. 

Second, market assumed that this will be the last rate cut this year for RBA. Boris Schlossberg from BK Asset Management pointed out that Australian cash futures curve stood at 2% all the way out to October of 2015, signalled no further benchmark rate cut on the horizon.

Third, RBA is still weighing in the strength of Australian Dollar amid low export commodities prices. Their statement spoke about this, Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

The third factor presents a substantial challenge for Aussie bulls. As we know it, when a currency strengthen while export goods prices fall, then export revenue that is an important part of the GDP will suffer double kick. The stronger Aussie is, the higher the pressure on RBA to intervene and somehow depreciate their own currency. Nevertheless, if commodity prices can rebound, then it may be possible for RBA to leave it to the market. 

 

IMF vs EU Intercept Greece Debt Talks

Reports in several international media yesterday indicated difference in opinion between IMF and European Union about what kind of policy will be dictated to the Greece. Financial Times mentioned an IMF official that suggested debt relief for Greece at Eurozone finance minister meeting in Riga. But afterward, Reuters quoted an EU official that refuted any suggestion of debt relief before reforms proposal properly arranged. While Greece revealed that differences between the IMF and EU about which program will be the focus of reforms is hampering the ongoing discussions. These reduced expectations on an agreement between involved parties any time soon, although negotiations are still underway. 

In the circumstances, Euro bulls against US Dollar yesterday stand on a shaky ground; moreover it also needs to be noted that Eurozone has not exited stagnation. Although US economy suffers setbacks in the first quarter of 2015, but the Fed is still fully expected to hike rates within the year. Because of that, the only argument left is about market anticipation ahead of NFP data release in Friday; which means the event presents substantial risk for EUR/USD movement forward, as well as ADP data that will be released on Thursday.

 

A Day Before UK Election

Forex market apparently ignored uncertainties that came with UK elections. Apathetically, Sterling moved up ignoring any future possibilities that might happen following the elections result, even the considerably high probability of divided parliament. It may be because the situation is different compared to last year's Scottish Independence referendum. The latest polls indicated there will be no significant changes among dominant parties, with Conservatives are expected to the the most chairs in Westminster but have to ally themselves with other parties to take the Prime Minister seat again.

On the other hand, the economy's performance is still one of the best in the world, particularly in comparison with its neighboring Eurozone. As well, although a bunch of dataset signalled moderated economic growth in the UK, but the Bank of England is still expected to hike rates at least in 2016. Seen from this perspective, tomorrow's elections probably will lead to ranging market, but any weaknesses on the Sterling likely will be temporary as its fundamental roots are still steady on the bullish direction except if US the Fed once again expected to hike rates in the near future.