The Australian dollar secured support from high commodity prices and yield considerations during the first half of the week. There were gains to highs of 0.8870 against the US dollar before a sharp dip to lows of 0.8560 in very choppy trading as global stock markets weakened sharply and risk aversion increased.
Consumer prices rose 1.2% in the second quarter compared with expectations of a 1.0% increase. Although the headline annual inflation rate fell to 2.1%, the core rate increased to 2.7%. Markets moved to increase the chances of an August interest rate increase to around 80% following the inflation data.
Reports of difficulties in Australian hedge funds and delays in bond issues undermined Australian dollar confidence later in the week.
The Australian currency will be supported by expectations of higher interest rates. The net effect of rising risk aversion is likely to be for a weaker currency, especially with reduced capital inflows from Japan, and volatility will remain higher.
Canadian dollar
Canadian dollar volatility was high during the week, especially on Thursday. The currency strengthened to 1.0350 against the US currency before a sharp retreat to 1.0600.
The Canadian retail sales data was much stronger than expected with a 2.8% increase for May while core sales rose 2.3% over the month. The Canadian currency drew support from the high level of oil prices during the week.
The currency was, however, undermined by a sharp drop in risk aversion with a reversal in speculative inflows which had been funded through the yen.
Canadian dollar volatility is liable to remain higher in the short-term. Underlying sentiment is likely should remain firm which will limit any further losses triggered by an unwinding of carry trades.
Indian rupee
The Indian rupee was trapped in relatively narrow ranges for much of the week and was holding close to 40.30 on Thursday after a nine-year high close to 40.20 with investment flows still firm.
There were, however, concerns over the trend in global stock markets and this undermined rupee demand late in the week. The currency also dipped sharply on Friday to 40.50 as regional stock markets fell heavily.
Initially, there was evidence of further Reserve Bank intervention to curb rupee gains while the high level of oil prices was a negative factor for the Indian currency.
Rupee sentiment is liable to be slightly weaker in the short-term with fears that higher global risk aversion will trigger an outflow of funds from local markets. Losses in the short-term should remain limited unless regional stock markets continue to fall rapidly.