USD strong, but what's the catalyst for the next move?

By John J Hardy, Head of FX Strategy at Saxo Bank

• AUD trades slightly weaker overnight
• EURUSD posts marginal new lows
• Bullard comments add to USD strength

21 July, 2015: The Reserve Bank of Australia minutes overnight provided little inspiration for AUD traders, as the statement was very similar to the June one and suggested satisfaction with the current 2% rate and dependency on incoming data.

Interest rates hardly registered the minutes as the focus shifts to tonight’s Q2 CPI release and a major speech by the RBA's governor Glenn Stevens. AUD traded slightly weaker overnight as AUDUSD is poised near the lows for the cycle below 0.7350 that were posted yesterday.

The Bank of Japan minutes were likewise greeted with a collective yawn, though some BoJ members are getting restless on whether the effects of the stimulus thus far are fading. The JPY continues to tiptoe quietly in the background in low-beta-to-the-USD fashion. Again, with the JPY, any rally seems to require ugly risk appetite developments to drive upside and, on the flipside, new highs in yields if we are to see a pickup in selling interest.

EURUSD actually posted marginal new lows for the cycle late in the Asian session as the USD was generally toward the stronger end of recent range in most of the major pairs – we’ve got little data of note for the US through the end of the week, though we will see the preliminary PMI data for both Europe and the US (with the market paying little attention to the latter because it is a Markit survey that competes with the official ISM surveys).

Perhaps adding a bit to the USD strength was St. Louis Federal Reserve Bank president James Bullard saying yesterday that a September Fed hike has better than 50-50 odds.

The focus is on AUD tonight as we await the Q2 CPI and speech by the RBA's governor Stevens. The general tone from the RBA has been one of “wait and see”, but if there is a surprise side, it is likely to the dovish side on longer-term concerns on Australia’s external imbalances owing to commodity weakness, which has been gathering pace lately.

AUDUSD is stuck in a slow-motion slide and we're looking for an impulse here to reinvigorate the bearish argument.