Solid Australian and Chinese data failed to lend support to the Australian dollar (AUD) on Thursday. Service sector activity accelerated in both countries, with Australia's PMI services index rising to 47.1 from 39.0, a jump that took the index to its highest level in six months.
Every underlying component with the exception of wages increased, and this alongside the improvement in manufacturing activity suggests that Australia is still on the path to recovery. The increase in service sector activity in China also bodes well for Australia.
While the improvement in both Chinese manufacturing and services was small, the world's second-largest economy is still rebounding, and that comes as very good news for the region.
The lack of economic data from Canada kept the Canadian dollar (CAD) in consolidative mode, but volatility could increase on Friday with the IVEY PMI report due for release.
The New Zealand dollar (NZD), on the other hand, gave back part of Wednesday's gains despite optimistic comments from Reserve Bank of New Zealand (RBNZ) Governor Graeme Wheeler.
In an op-ed for The New Zealand Herald, Wheeler outlined the reasons behind the recent decision to restrict high loan-to value-ratio (LVR) mortgages, and explained that if this fails to "slow house price inflation, larger increases in the official cash rate could be required." These hawkish comments should have driven kiwi higher, but the currency instead sold off against the US dollar (USD), euro (EUR), and the Aussie.
Bank of Japan (BoJ) Policy Announcement Tonight
The Bank of Japan (BoJ) will conclude its monetary policy meeting tonight, and we expect policy to remain unchanged. The central bank is comfortable and confident about the strength of the recovery, and the positive sentiment is validated by the recent quarterly Tankan report, which rose to its strongest level since 2008.
Some economists fear that the BoJ is overly optimistic, but the data has been quite favorable. The latest services PMI business activity index rose to 53 in September, up from 51.2 the prior month, which comes as a sign of continued recovery.
Right now, the Japanese economy can do with its current level of stimulus, but if Prime Minister Shinzo Abe raises the consumption tax in April without also cutting corporate taxes, the BoJ may have to swoop in with another round of stimulus. However, we have six months until April, so more quantitative easing (QE) is not on the agenda right now, and we expect continued optimism instead.
According to the Ministry of Finance's weekly portfolio report, Japanese investors were net buyers of foreign bonds for the third straight week. Overseas demand for Japanese stocks has also been strong, suggesting that global investors are staying away from the Nikkei, thus creating offsetting demand for the yen.
By Kathy Lien of BK Asset Management