Australian Dollar Drops as RBA Official Threatens FX Intervention

Talking Points:

Aussie Dollar Plunges on RBA FX Intervention Threat, Kiwi Dollar Follows
Euro May Be Pressured if ECB Survey Bolsters the Case for “Sovereign QE”
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The Australian Dollar plunged in overnight trade after RBA Assistant Governor Christopher Kent said the currency was trading above most measures of fundamental value and warned the central bank has not ruled out FX intervention. The New Zealand Dollar followed its Aussie counterpart downward, presumably amid speculation that an incursion into the markets from Australian authorities would inspire a counter-move from the island nation. The RBNZ has intervened into FX markets before and would almost certainly not take kindly to forcible weakening of the Aussie considering New Zealand’s close trade ties with its larger Oceanic neighbor.

Looking ahead, traders will be keen to inspect an ECB Survey of Professional Forecasts for clues about the central bank’s future stimulus expansion intentions. Mario Draghi and company have delivered a wide assortment of easing measures this year and a near-term move to do more is unlikely as policymakers wait to evaluate results from efforts already at work. With that said, the ECB can surely imagine the possibility that its actions may prove insufficient and will want to at least set the stage for “sovereign QE” if it proves necessary. A number of key member states (most notably Germany) oppose this but may be swayed in the face of overwhelming evidence. To that end, a survey pointing to continued weakness on the inflation front despite the ECB’s moves to date may be seen as building a case for more expansive accommodation in 2015, weighing on the Euro.

On the Fed commentary front, remarks from Charles Plosser and Narayana Kocherlakota– Presidents of the central bank’s Philadelphia and Minneapolis branches, respectively – are unlikely to offer much of a lead for the US Dollar. Both officials spoke yesterday and defended the positions of their respective camps, with Kocherlakota arguing for delaying rate hikes while Plosser called for expediting them. More of the same seems likely, which ought not give markets anything beyond what is already priced into exchange rates. Chair Yellen is also due to speak, but her welcoming remarkets at a joint Fed/ECB conference seem unlikely to delve into policy specifics.

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