Aussie Hits Fresh 6-Year Low While Yen Gains
Friday’s Asian session was mainly characterized by steep falls in the region’s stock exchanges, as Japan’s Nikkei fell more than 2% and other stock markets were down as well. The sense of risk aversion boosted safe haven currencies such as the Japanese yen, as dollar/yen traded comfortably below the 120 key level, while driving down currencies such as the Australian dollar.
It was suggested that some market participants were closing positions in anticipation of the August US employment report, as a strong report could mean that the Federal Reserve would have to raise interest rates during its next meeting in 1 ½ weeks’ time. This, in turn, could increase cautiousness in the market.
The euro was digesting the previous day’s substantial losses, after the ECB President indicated that the bank could increase and extend its Quantitative Easing program. The euro was trading at 1.1130 versus the dollar, after dipping just below 1.11 during the previous session. The euro also retook the 133 level versus the yen after it dipped to as low as 132.60. The yen’s allure as a safe haven relative to the euro was boosted by Draghi’s comments that the ECB was considering enhancements to the QE program, while there has been little indication that the Bank of Japan was considering to boost its monetary stimulus.
The Australian dollar dipped to a fresh 6 ½ -year low of 0.6960 versus the US dollar on continued selling because of worries about a Chinese economic slowdown and a drop in commodity prices. The pair was struggling to hold the 70 cent level lately. Chinese markets were closed for a second day today because of a national holiday.
Looking ahead, the main event to watch will, of course, be the US employment report for August. The economy is expected to have generated around 220 thousand new jobs, while the unemployment rate is set to drop to 5.2% from 5.3%. A continuation of the labor market’s improvement could further build the case towards a rate hike.
The importance of a single month’s evidence should be put into context however, although if the upside or downside surprise is large, it could influence the argument. Before the employment numbers, Jeffrey Lacker of the Richmond Fed will give a speech. The speech will attract attention despite the fact that Lacker is a known hawk. Any views from Fed officials prior to their all-important meeting on September 16/17 will be scrutinized.