Vantage FX | Can the RBA support the Australian Dollar? Probably | 6 August 2013

August 6, 2013

Recap

  • Stocks were lower overnight on balance in the US and Europe in what was fairly quiet trade. The Monday after non-farms is often a bit of a holiday and at the close the Dow (-0.30% @15,612), the S&P (-0.16% @1,707), the FTSE (-0.42%), DAX (-0.11%) Milan and Madrid all lower. The NAsdaq and the CAC managed to eke out small gains but the highlight of the night has been the announcement this morning that Amazon founder Jeff Bezos is buying the Washington Post. That is truly interesting.
  • Also interesting were moves in Global FX markets with the US dollar under a little bit more pressure with the Euro (1.3254) trading up to 1.33 at one stage, Sterling (1.5352) stronger after the very good print on the Services PMI above 60 (truly amazing). The Yen is on its highs (USDJPY, 98.19) and is the best performer of the big pairs overnight while the Aussie (0.8927) has recovered strongly from yesterday’s forays down to an 0.8846 low which might be THE low.
  • Data yesterday for global services was not too bad really with many countries from China to Portugal and especially the UK beating both last month and expectations in the Markit non-manufacturing PMI’s released in the past 24 hours.
  • Rates across the globe were up a little after the solid services PMI’s 10 year US Treasuries at 2.64%, Bunds at 1.69% and Gilts at 2.48%. Interesting the tiny reaction in bonds versus currencies again – seems currencies are very short term.
  • Commodities were lower across the board which is a bit weird given the US dollar move but the data is about services not physical inputs so it kind of makes sense. Nymex crude fell 0.47%, gold was down 0.57%, copper down a penny of 0.11% and our friends the Ag complex were at it again with corn down 1.47%, wheat off 2.35% but soybeans were more quite losing only 0.09%.

Does anything really matter in Australia except the RBA today. Are they going to cut? Probably. But it is their words that are the key today and I reckon they will be optimistic which interest rate markets might not like and FX traders just might love (although the shorts are going to hate it) more on this below.

In other data we see the release of the AiG performance of services index, ANZ job ads, House price index, trade data and then the RBA in Australia. Japan releases its leading and coincident economic indices and in Europe we get IP and GDP in Italy, IP in the UK and factory orders in Germany. Canada releases its trade data as does the US.

The RBA will cut and then be positive – it is an election after all

Moving interest rates during an election used to be something that a central bank in Australia was loathe to do. But the current RBA Governor has shown himself a man above convention and has moved rates when and if he deems necessary whatever the point in the political cycle.

So I reckon that the RBA is going to cut today and it is about time because they should have cut at least once in the past couple of months.

But I also reckon that the RBA is going to tell us that interest rates are working. After last month’s decision to not cut the RBA said we were growing below trend but also that,

The easing in monetary policy over the past 18 months has supported interest-sensitive spending and asset values and further effects can be expected over time.

I reckon they will draw on that again today and be as positive as they can be without getting caught in the political maelstrom that the coalition is already trying to start by saying a rate cut is a sign of economic weakness. So the RBA has to tread a fine line with what it says but I reckon it will be upbeat – otherwise why not cut 50 points?

So what about the Aussie Dollar? 

I reckon the upbeatness will help the Aussie continue to recover from the low yesterday of 0.8846. This was just 16 points above the bottom of the channel I identified yesterday and which you can see in the chart below.

Clearly this is tentative and clearly my channel is speculative but the CFTC guys are mega mega short as I discussed yesterday and at more than 74,000 net shorts is an all time record. This does not mean they are suddenly going to have to flip their positions, the Aussie would have to run a few hundred points to achieve that, but as I noted in the Financial Times article this morning this means there is not a lot of “positioning space” for fresh shorts down here in the 88-89 cent region.

So the balance of risks is shifting for the Aussie short term – only short term but shifting nonetheless.

Have a great day

Greg

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