Vantage FX | CPI day, will the Aussie reverse or break out on weaker USD | 24 July 2013

July 24, 2013

Recap

  • The US dollar remains on the back foot assailed overnight by a huge drop in the Richmond Fed Manufacturing Index which fell from 8 last month to -11 this month against expectations of +7. The data in the US continues to disappoint undermining the USD and making my expectations of Septaper a little less strong.
  • The Aussie (+0.48% @ 0.9289) and CAD (+0.43% @ 1.0286) were the big winners against the USD but the EUR (1.3221), GBP (1.5378) and JPY (99.46) were also stronger against the USD. Today’s editorial will look at the Aussie dollar in the context of the CPI today.
  • Key driver of the Commodity bloc was the news from China, Xinhua via Bloomberg, that Premier Li Keqiang said that 7% is the bottom line for growth that China needs to achieve to achieve a moderately prosperous society by 2020.
  • Stocks in the US were mixed with the Dow and S&P hitting both a fresh intraday highs before the Dow closed at a new all-time closing high of 15,568 (+0.14%) but the S&P (1692) and Nasdaq (3579) were lower by 0.21% and 0.59% respectively. Plenty of earnings overnight beat expectations as Apple has done after the bell but Du Pont and Travellers disappointed. In Europe it was another poor performance after early strength (China induced) for stocks with the FTSE, DAX and CAC all down following the direction of US stocks but Spain rose 1.36% after a positive debt auction.
  • In Australia the ASX was becalmed in the past 24 hours really and will be driven by expectations about rate cuts after the CPI at 11.30 today.
  • Bonds were slightly higher, but hardly material, across the Board with the US 10 year at 2.51%.
  • On Commodities Gold’s break out continues and it sits at $1344 this morning, Copper caught a lift on both a weak US dollar and the Chinese growth comments, Corn and Soybeans got spanked down more than 3% each and Silver fell 1.23%.

Data out today is front and centre with the release of Kiwi trade balance, Japanese trade data (super important) and the Australian Q2 CPI (super super important for the AUD) before we get stuck into the next round of preliminary Markit and HSBC PMI’s for China, France, Germany, EU, Italy, UK and US – big data flow – and then new home sales and the Crude draw.

So it is a big 24 hours for markets

Just quickly on China

I have spent a lot of time in the Weekly Newsletter over the past month talking about the new Chinese regime and their desire to rebalance the economy in favour of the many and not just the few which is largely what you could argue the last 10 years has been about. It is a similar transition that other economies since the Industrial Revolution have themselves been through but without the focus of markets and pundits. Equally the new guys are fairly young by leadership standards and are feeling their way and probably feel they have made some communication errors recently – or at least been misinterpreted.

So yesterday’s comments were aimed at redressing the idea that 6.5% or lower is seen as acceptable but the key point for me and the one that suggest stimulus is not being rushed too nor is the transition to better quality growth changing were Li Keqiang’s comment that,

As long as the economic growth rate, employment and other indicators don’t slip below our lower limit and inflation doesn’t exceed our upper limit we’ll focus on restructuring and pushing reforms

So I don’t think this is the reversal or stimulus symbol some are suggesting overnight – like the Fed and Bernanke the Chinese leadership is just trying to qualify and clarify their message.

The Australian dollar and CPI

The Aussie Dollar has been bid up on the back of US dollar weakness and a market that is heavily short as we saw earlier in the week in our look at the CFTC Commitment of Traders report.

Today sees the release of the release of the Q2 CPi with the market expecting a year on year outcome of 2.5% and a headline for the quarter of 0.5%. O.5% is a run rate of 2% per annum if you annualise it so it might be difficult to get a number that is significantly lower which in the context of the current market means that the Aussie at or near the top of the box and with current positioning might be poised for a big break higher.

It is worth rehashing what I wrote in the weekly

“the inflation outlook that says that the RBA has room to move. Readers know I don’t agree with Milton Friedman I think inflation is everywhere and always an aggregate demand phenomenon. Sure sometimes lots of money in the system with the ability to borrow leads to increased inflation through increased demand but as Steve Keen writes if the ability to take on more debt is absent then there is no debt multiplier and so weak aggregate demand in Australia as Australian’s focus on paying off their houses and down debts is unlikely to see inflation rise – even if the Aussie falls.

So if the TDMI inflation gauge is a good guide to the CPI data to be released this week, then we are unlikely to see any impediment to an RBA cut…

So the weak employment we have seen since the RBA meeting and the monthly and bigger and scarier quarterly NAB Business surveys to me suggests that the outlook is such that the economy does need stimulus. The Aussie is also not in free fall any more so a cut will see it drop but perhaps not cascade lower as it might have if a July cut had of been delivered.

Which leaves me with a dichotomy between my fundamental view and my technical view if 0.9330-50 Box top breaks.

But fundamentals are just part of the story as are technicals and as is the USD.

SO if the box top breaks then just like gold we’ll be look for a big move – 0.9600/50. But unless or until the box breaks the Aussie is in the sell zone with obvious stop levels to put in place.

Have a great day, there are plenty of catalysts for profits and losses so caution might be warranted unless you have a lot of experience, in which case – have fun.

Greg

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