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Traders circumspect ahead of central bank meetings

15.26 AEST, Wednesday 1 August 2012

Traders circumspect ahead of central bank meetings

By Tim Waterer (Senior Trader, CMC Markets)

The unified sentiment expressed by EU leaders that initially signalled a Green Light for traders has now turned to more of a flashing amber colour as we await outcomes from the FOMC and ECB meetings. While September seems a more plausible timeline for the announcement of QE3 by the Federal Reserve, in the case of the ECB traders will be demanding some immediacy regarding central bank action.

Given the run higher by risk assets generally since Mario Draghi signalled his defence of the Eurozone last week, heading into the ECB press conference on Thursday the downside risks seem to outweigh risk to the upside by some degree. The premise for the push higher in equities, commodities and the Euro was that the ECB will step up its game, pronto. Hence the Thursday ECB press conference is shaping as a D-Day of sorts for the Eurozone if good intentions are not backed up by decisive actions.

The Australian Dollar had a brief dip after the Chinese number came in just shy of expectations at 50.1, with the currency slipping from the 1.0490’s down to the 1.0460’s. But this was just a blip with the AUDUSD rate bouncing back to just below 1.05. The initial negative reaction to the data was understandable however on reflection any Chinese PMI reading above 50 will be gladly taken in the current environment, and on this basis the AUD’s initial dip was short-lived.

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Given where the AUDUSD rate stands, anything from the FOMC which is suggestive that QE3 is one step closer to seeing daylight will have the Greenback sold off and potentially open the door for the AUD to hit 1.06 by the end of the week if the Fed show a willingness to act in coming months with further stimulus. However if Bernanke and co start to suggest QE3 is more on the backburner then we would see some USD strength and the AUD would likely recede to the 1.0370-1.0420 range.

Circumspect trading was the order of the day on the Australian market, with some apprehension creeping in amongst investors on the doorstep of key FOMC and ECB meetings. This naturally led to range-bound conditions on the ASX today, while some traders took the opportunity to lock in some profit after the recent winning streak on the local bourse. How the Australian market rounds out the week over the next two days will be largely subject to how the FOMC and ECB meetings are received by the broader global market.

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