Vantage FX | Aussie Dollar holds range bottom as stocks celebrate Dow 15,000 | 8 May 2013

May 8, 2013

The Dow closed above 15,000 for the fisrt time and the S&P just keeps on keeping on ending the day at another, yes another, all time high of 1,626. Interestingly for those us here in Australia used to watching the globe for an indication of what is going to happen in the Australian share market and the Aussie Dollar Market Watch laid the reason for the rally firmly at the door of the RBA when they wrote this morning,

U.S. stocks rose on Tuesday, with the Dow industrials closing above 15,000 for the first time, after Australia cut its refinancing rate and satellite-TV provider DirecTV and watch maker Fossil Inc. reported improved earnings.

I bet that will surprise the RBA board who firmly voted for the rate cut because of a deteriorating economic outlook, low inflation and a high Aussie Dollar. Indeed the fact the Aussie only had a low of 1.0152 might also surprise them given that it is clear in the statement that the high Aussie Dollar was clearly part of the reason for the cut saying,

The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time.

So clearly the Aussie is partly the target of this action to take rates to a modern day low of 2.75% and they may be a little disappointed but as you can see in the chart below the Aussie has some serious range bottom support around the 1.0115/20 region so to get within 40 points is fairly close in the big picture.

We are still short but the 4 hour charts suggest that a rally back toward 1.0220/30 could be in the offing and maybe the Aussie’s outlook will hinge on the outcome for the employment report tomorrow where the market is, according to FXStreet, looking for a rise of 12,000.

Crucially for Australian interest rate markets, for the Aussie and for Australian bank stocks the RBA is saying that it will likely also need to cut again. It has been my view since late 2011 when I was treasurer of an ADI that rates would need to fall to 2.5% given the outlook for the economy and my read of it. Not many people were listening then but with only 25 points to go I have to admit that unusually I am thinking of putting my terminal forecast even lower given the outlook – perhaps 2%.

Now we know the Aussie is being targeted and by definition the RBA is looking at monetary conditions within the economy we can expect rates to be pushed much lower unless the Aussie get below parity.

Turning back to stocks for a moment the FTSE was higher on the back of bank shares closing up 0.55%, the DAX was buoyed by the much better than expected German factory orders which were up 2.2% against the -0.5% that was expected by the market. The CAC was 0.36% higher while stocks in Milan and Madrid rose 1.54% and 0.47% respectively.

In the US there was no material data out so clearly it MUST have been the RBA rate cut that drove the markets higher. Perhaps as cynical as we are about the reporting quoted above the fact that the RBA has had to cut rates in an economy that was seen as a bit of a miracle down-under does actually have something to do with the rally because it reinforces the notion that QE will be coming to Europe, that QE is going to continue in the US and so there are little headwinds – other than growth – to hit the share market rally.

On FX markets the better German data kicked Euro higher initially driving it to a high of 1.3131 but this was unsustainable as you can see in the chart below and the Euro is trading at 1.3077 this morning and clearly wanting to test support of the trendline below which comes in below the recent range of 1.30-32 at 1.2988 today.

On other FX markets USDJPY turned lower from near the highs of the recent range from a high of 99.43 last night to sit at 98.98 this morning. USDCAD is still headed lower and is just 45 points above our target of parity and big trendline from September 2012 that comes in at 0.9995. Sterling turned down as we noted it might in yesterday’s Morning Call but found support at out fast moving average which often happens – a break of this level which corresponds to 1.5444 this morning would signal a deeper move.

On Commodity markets Crude drifted off a little down 0.64% to $95.54 Bbl, Gold reversed from our sell/resistance zone again falling $19 to $1448 oz and Silver was 0.651% lower to $23.85 oz. Dr copper was off  a little falling 0.24% while the Ags were much more quiet than the previous night with Corn down 0.33%, Wheat up 0.94% and Soy Beans up 1.32% – relative quiet.

Data

The RBNZ Financial Stability report is always an interesting read an is out today as is the Chinese Trade data which will be influential for the Aussie Dollar and Industrial Production in Germany will be important tonight. We expect that the German IP data might mirror the Chinese trade data. In the US it is once again a quiet night.

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