AUD Downed by RBA Minutes, BoJ Next

One of the most powerful signals in markets is when a something rallies despite bad news. The latest example is the Australian dollar, which was the top performer on Monday while the euro lagged. The Bank of Japan decision is next. But it appears the Aussie is finally pulling back in reaction to the RBA minutes.

Aussie Reacts to RBA Minutes

Aussie oulling lower after the minutes of this month's RBA meeting restated that very low interest rates would continue to support growth in dwelling investment and household consumption. The RBA added that Aussie depreciation in response to significant declines in commodity prices was expected to support growth, particularly through larger contribution from net service exports. inflation forecast to remain consistent with target over next 1-2 years. Labour markets were described as mixed.  The central bank added that the first US federal funds rate in around nine years could have significant effects on financial markets despite fact it had been well telegraphed.

A normal recipe for Australian dollar weakness could include: A commodity slide, including energy and metals; a more than 2.5% decline in the Shanghai Composite; and a mild round of broader risk aversion. All those things combined Monday with a political coup that saw Australian Prime Minister Tony Abbott ousted by his own political party and replaced by Malcolm Turnbull.

Throughout it all, the Australian dollar climbed higher. It reached 0.7151, which is the best level since Aug 31. In a little over a week, AUD/USD has made a strong case for a bounce.

First came a three candle reversal to begin last week, that was followed by a bullish outside day on Thursday and now there is this. Many clouds remain in the overall Australian dollar picture but a retracement from the three-month rout to 0.69 from 0.81 is a better short term bet than continued declines.

AUD/USD will stay in focus later with the 0130 GMT release of the Sept 1 RBA meeting minutes. There were no surprises in the announcement and the RBA has a slight easing bias. A release like this can often be interpreted however a market likes and if it leads to more AUD gains, it's another reason for conviction.

The major event on the schedule is the BOJ decision. A good reason for JPY longs to pay special are ahead of the BoJ meeting is that only 2 of 35 economists surveyed by Bloomberg are calling for surprise easing so it's a live decision but newswire 'sources' have said the BOJ won't ease. We're looking for signals about a potential cut later this year and that could come via downgrades to the inflation forecast. Still, there are rumors that the BOJ doesn't believe there is much more it can do and is worried about eating up too much JGB liquidity.