Euro’s rise against Aussie dollar may run out of steam

LONDON: The euro may be close to peaking against the Australian dollar after sharp gains in the past two weeks, regardless of whether the Reserve Bank cuts interest rates today.
Aussie dollar bears, who have seen the euro rise to above A$ 1.2500 yesterday from a low of A$ 1.2152 on Nov 14, would disagree. They could point to a flood of Australian data on Monday that showed a below forecast flat month for retail sales, leaden demand for labor and tame inflation.
The market is understandably convinced that Australia’s central bank will cut its benchmark cash rate by 25 basis points to 3 percent today and a Reuters poll of economists on Friday saw such a move as highly likely.
That would make 1.25 percent points of rate cuts since May.
The question is whether or not this is already priced.
With so much of the market expecting a cut, perhaps the risk is that traders then have to buy back the Australian currency because the trade is so congested with Aussie dollar shorts.
The fact that the pace of activity in China’s manufacturing sector, as measured by the HSBC Purchasing Managers Survey, quickened for the first time in 13 months in November is another reason to be cautious in betting on further Aussie weakness.
If China, a major market for Australia’s commodity exports, is stirring, that might begin to provide some support for the Australian dollar, especially if many players are running short of the currency.
On the euro side of the trade, European Central Bank governing council member Christian Noyer said it was up to euro zone governments to improve public finances and use structural reforms to make the region’s economies more competitive.
The implication must be that, to date, such efforts have fallen short of what the ECB thinks is needed.
If that were the case, market optimism that policymakers are getting ahead of the euro zone debt crisis may be overdone.
The euro zone manufacturing sector hardly presents a compelling case for buying euros either.
While Markit’s Eurozone manufacturing Purchasing Managers Index rose to 46.2 in November from October’s 45.4, it is still contracting. At the same time, Germany’s manufacturing sector shrank for the ninth straight month, albeit at a slower pace than the previous month.
The rise in the value of the euro against the Aussie dollar may already have priced in an Australian rate cut today. Some traders may see A$ 1.2500 as a good point to book profits on long euro positions or even to venture short of the pair.
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.