Vantage FX | While markets await the Fed the RBA hits the Aussie | 31 July 2013

July 31, 2013

Recap

  • Data and thoughts about the Fed were the big drivers globally over the past 24 hours with poor data outturns in Korea and Japan (IP -4.8% YoY, -3.3% MoM much weaker than expected) as well as Australia (building permits tanked -6.9% MoM).
  • But in Europe German Gfk confidence was at 7 for the highest read in years, European business climate and economic sentiment improved slightly as did industrial confidence. German CPI came in higher than expected (+0.5% v +0.3% expected) which may pose some threat to the ECB’s accommodative message later this week. In the US the Case Shiller house price index was a little weaker than expected at 12.2% YoY but that’s not too bad really but consumer confidence  fell back to 80.3 from 81.5 expected and 82.1 last.
  • On Global FX markets as a result the Euro leapt higher but pulled back (1.3262) to be largely unchanged, GBP (1.5238) is off a big figure, USDJPY (98.00) is largely unchanged but the Australian Dollar (0.9062) and Kiwi (0.7983) were lower after weak data.
  • The Aussie got absolutely poll axed collapsing  yesterday from a around 0.9210 to an overnight low of 0.9041 on the back of the Dovish speech yesterday by RBA Governor Glenn Stevens which has heightened expectations of a cut next week and left the market in no uncertainty that the RBA thinks, and by inference would tolerate, the Australian Dollar going lower.
  • On Stock  markets there was more M&A news and the dissolution of a big Potash partnership in the old Soviet Union which might wack BHP in our time zone today. At the close though with Facebook up more than 6% the Nasdaq (+0.47% 3,616) made a fresh 12 year high, the S&P 500 (+0.04% @1686) was largely unchanged as was the Dow (-0.01% @15,521). In Europe the better data buoyed stocks with the FTSE (+0.16%), the DAX (+0.14%), CAC (0.46%), FTSEMIB (Milan, +1.64%) and IBEX35 (Madrid, +0.97) all higher on the close.
  • In Australia today I’ll be watching BHP and waiting to see if the ASX 200 can break out on the futures market above the 5022 resistance
  • 10 year yields are fairly calm at the moment awaiting the Fed, BoE and ECB. UST’s (2.61%), Bunds (1.67%) and Gilts are at 2.32%.
  • On commodities Nymex Crude was lower (-1.42% @$103.07) and looks like a top is in on the charts. Gold ($1325 oz.) fell but recovered, Copper did not like the Korean or Japanese data and is down 2% ($3.04 lb.). Corn was up 1.38% while Soybeans fell roughly the same amount.

On the Data front there is plenty over the next 24 hours with Nomura Manufacturing PMI and Cash Earnings in Japan, Private Sector Credit in Australia, Construction and Housing In Japan as well. French spending and unemployment in Germany, Italy and Europe before EU CPI data. In the US it’s ADP employment and the preliminary GDP for Q2 Chicago PMI and the Fed Decision early doors Asian time tomorrow morning.

Australian dollar pollaxed as market wakes up

An intentionally provocative headline to this piece because the punditry should hang their collective heads in shame about their ability to do nothing but move from one economic release to the next and hang on the words of the RBA and its Governor and operatives rather than analyse the underlying economic circumstances that face the Australian economy.

II won’t go any further than that because this game is hard and I am not one to get snarky with individuals about their economic forecasting performance but I would request Australian journos and pundits use a bit more critical thinking about the economy.

From one month to the next, emergencies like the late 2008 period notwithstanding,  it hardly ever matters whether the RBA cuts or not but we all focus on it as if the Australian economy were a sports car to be turned around with a flick of the hand brake and the wheel turned to full lock.

What is important is the trend and yesterday Glenn Stevens made it clear that the RBA finally understands that having made room for the mining boom by crushing consumers that they are not coming back in a hurry and the period of adjustment would be difficult and as such rates would be lower and the Aussie dollar needed to do its part.

Key was that he reiterated the fact that the inflation outlook still gives scope for easing,

This has been guided by the flexible inflation targeting framework we have had in place for 20 years now. This framework has prompted appropriate and timely action when needed. It has seen a substantial easing in monetary policy since late 2011. We have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand. The recent inflation data do not appear to have shifted that assessment.

Many had thought the fall of the Aussie dollar might concern the RBA but the reality is that even allowing for the tradable component aggregate demand in Australia, as elsewhere, is not strong enough to induce the sort of inflation that worries central bankers.

Will they cut next week? The interest rate futures market thinks so and I might finally be right after thinking they should have the last two meetings. Everything I look at in the economy points strongly to an RBA cash rate at 2.25% perhaps even lower in the months ahead.

Clearly I am not alone and the Aussie got sold, and sold heavily as you can see in the hourly chart below.

Clearly we are still in our Darvas box and clearly, on the hourlies at least the Aussie is oversold and may rally today. As I wrote yesterday I was short and took profits on the way down closing out the last quarter of my position in the 0.9060’s.

I will respect tha box as I have up the top unless or until I see AUD trade under 0.8985 at which point I am likely to dive in and sell some more and do so with gusto.

Have a great day and watch the Fed tomorrow morning

Good luck

Greg

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