The FOMC statement on Wednesday has proved advantageous for high risk currencies, particularly the AUD/USD and NZD/USD. Both currencies have seen an advantageous rise since Wednesday, with the Aussie gaining over 1.3% to be currently buying 94.36 US Cents.
Noticeable frustration from the RBA has been displayed this week with the ASX alone gaining AUD$14billion from FOMC rhetoric. The case for utilising macro prudential tools on bank lending/capital ratios will most certainly be pushed onto the Stevens & Co, as the mainstream media’s fixation on the idea intensifies.
The move would almost certainly cool off the pressure on the housing market, while also allowing Australia to remain competitive for international investment. However, until the real exchange rate (Wages + Exchange Rate) can improve, Australia will remain in the current uncompetitive trading band – with the results widening the gap within the two speed economy.
Overnight, the Swiss National Bank Rate was left on hold as expected, with key inflation figures remaining on target showing that the land bound nation’s economy is chugging on. The decision saw the US Dollar lose ground to the Swissie, buying a session low of 90.89 Swiss Francs.
British retail sales for August were 1.2% lower coming in at 2.1% for the year, which saw Cable gradually lose over 115 pips, for a session low of 1.603 US Dollars. The news causes concern as Public Finances for August area released tonight. The figure looms as an important signs for the British economy and its government’s fiscal policy, while UK pundits look for signs of a recovering economy.
Overnight in the US we saw the FOMC hangover slowly falter with US Existing Home Sales, the Leading Indicator and Philly Fed Index coming in higher than expected.
Eurozone consumer confidence for August is expected to lay flat overnight with limited Euro movement.
Over the Atlantic the commodity bloc is highlighted with Canadian Core CPI expected to show signs of deflation for August, a negative sign for an economy with a significant housing bubble. The Hawks outweigh the doves overnight with three FOMC committee members, Georg, Bullard & Kockerlakota, likely to give some insight into their current thoughts on monetary policy in New York.
The release of the RBA’s Board minutes on Tuesday morning provided more of a neutral assessment of state of play. Board members agreed “that the bank should again neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce them”.
One of the more interesting notes on the minutes was the boards brief on the current macro-prudential efforts taken by the Reserve Bank of New Zealand. The current loan-to-valuation restrictions on mortgage lending, prevents New Zealand banks from aggressively lending to the housing market through bank ratio reductions.
The interest by Stevens & Co is natural given the strong relationship between both countries Banking/Real Estate markets, however it may provide “scope” for the board to monitor policy by other means.
With September’s minutes rather neutral, it did little to prevent the AUD/USD climbing to its session highs of 93.65 US Cents – a surprise considering that household consumption, mining, retail sales, and the labour market all remained noticeably flat over the month.
In a positive sign for the British economy, CPI for August remained relatively flat considering the current stimulatory action taken by the Bank of England. However, with the Saxon nations Producer Price Index doing little to excite the GBP/USD, and a raft of flat retail and housing data – cable was brought down to a session low of 1.588 US Dollars.
In a pleasant surprise for Eurozone pundits, the German ZEW Economic Sentiment indicator increased 10.22% more than expected to 49.6 to show medium term growth sentiment was increasing – surprising, considering the current political uncertainty in Germany.
Westpac’s Leading Index and Chinese Property prices are set to provide an insight into potential for short to medium term growth within Australia, with the previous Leading Index showing a -0.2% retraction in July.
Heading to Europe the data pulse is relatively moot with the Bank of England minutes, set to provide some awareness of Caddie Governor Mark Carney’s “forward policy, as the markets get set to take positions after the FOMC decision.
Looking ahead, markets have priced in the “Septaper” as a “shoe in” along with Janet Yellen’s appointment as Fed President. Surprisingly the relatively lax considering the significance of the FOMC event, potential for knee-jerk reactions are thus fairly likely – with the fence seeming the most advantageous seat for the time being.
At time of writing the AUD/USD is buying 93.5 US Cents.
After an sustained period of weakness, the last 7-days has seen the Aussie looking in decidedly better shape with a series of elements aiding the local unit to forge near 5 percent gains from the late August lows. Clearly one of those elements has been a strong data pulse from China with trade, inflation, retail sales, fixed asset investment and industrial production data seemingly inspiring a sense of solace that the world’s second largest economy is not falling of the metaphorical cliff, and will continue be a source of demand for the rest of the globe. While China remains a source of inspiration, so too has the ‘taper-trade’, with market participants gently moderating expectations the Fed will slice a portion of its monthly asset purchases next week. A third part to the equation remains Syria, with the rhetoric spilling out from the U.S looking less like a military strike in the region – a theme which has previously promoted a ‘risk-off’ market demeanour. It should also be noted the positive effects of political closure, with the Abbot government expected to inspire new life into Australian businesses – something which was apparent in NAB’s August business confidence data yesterday.
Separately, we also note further weakness from the Yen which remains out of favour from both a risk perspective, while the idea of the nation climbing out it’s ‘lost decade/s’ appears to be gaining traction with the help of a morale boost in the form of the Olympics’ 2020 win. Taking a more abstract look at the broader risk environment, this too should also be a counted as a source of residual support for high-beta currencies such as the Aussie dollar.
Clearly markets have a tendency to price in extremes, and the rationale behind a significant change in risk trends, can quickly make an about-turn as soon as the Fed says ‘taper’. It apparent this will be a key theme in the days to come with positioning changes likely ahead of the FOMC decision next week. Given that we’ve seen a period of greenback weakness, it would be reasonable assume a consolidation period once again ahead of the Fed decision as last minute nerves take hold. Assumptions aside, part of the reasons why we’ve seen a burst of energy from currencies like the Aussie dollar remains the decidedly speculative short positioning noted only just weeks ago in the weekly CFTC commitment of traders report. This is another obvious source of support with the weaker hands being squeeze out, furthermore encouraging new long (momentum) plays.
Domestically, the aforementioned NAB business confidence data release is perhaps a precursor to an influx of post-election investment and money markets have suitably scaled back expectations the RBA will slice another 25 bps off the official cash rate in October. The next top-tier directive for the Aussie will come in the form of jobs data on Thursday which is expected to see the Australian economy add 10,000 new jobs in August and the official jobless rate edge up to 5.8 percent.
From a technical perspective we can see solid resistance around the 93.2 US cent mark, which has previously kept upside momentum at bay. Should the stars continue to align, there appears to be a lot of fresh air up to the mid 96 handle.
In keeping with recent releases from the Euro region, the data pulse overnight continued to beat that little bit stronger with 2Q GDP rising 0.3% quarterly as expected and -0.5% annually. Among member states Portugal showed the highest growth quarterly (1.1%), closely followed by Germany, with Cyprus still lagging behind, retracing -1.4% over the quarter.
The EURUSD was rather moot for most of the European session until the New York opened providing a boost of 49.5 pips to 1.321 US Dollars for a session high.
Eurostat highlighted that the strongest growth industries were Exports and Government sector spending, however the Portugal government urged caution in interpreting the figures. Sales of refined petroleum accounting for 50% of the boost and are subject to extreme volatility, particularly with the current situation in Syria. This was reiterated with a noteworthy reduction in Eurozone retail sales decreasing -1.3% annually.
Across the Atlantic, The Bank of Canada left rates on hold as expected at 100bp, increasing sentiment in the Caddie. The USDCAD lost 46.7 pips for a session low of 1.047 Canadian dollars.
Asia kicks off with a bang with BOJ Rate decision expected, AUD Trade Balance highlighted for July – a key figure on determining future scope for Steven & Co.
Yesterday, the release of the ABS Australian Real GDP met market expectations, flattering the Australian economy with 2.6% annual GDP and 2nd quarter GDP at 0.6%. Market sentiment slid to the Aussie’s favour jumping 95.6 pips for a session high of 0.91040 by midday.
Evident of the reality of the economic situation in Australia, was real GDP on a per capita basis, increasing by only 0.1% quarterly and 0.9% annually. But the proof in the pudding was real national disposable income per capita falling by 0.1% quarterly and 0.9% annually, signalling a potential future downward position in the Australian markets.
The ensuing political uncertainty for business and consumers was again reiterated with the AiG Service Index for August coming in 1% lower at a 39 figure, showing that Australian manufacturing and services have been contracting for an extended amount of time – yet Finance, Insurance, and Real Estate are still going strong.
This Saturday a new government will look to restore business confidence and efficiency, which may provide manufacturing and services something to lean on. The timing is perfect with the WEF Global Competitiveness paper naming Australia as the 137th for hiring & firing practices and 135th for wage setting.
At the time of writing the Aussie is trading near 3-week highs of 91.7 US cents ahead of significant amount of event risk to wrap up the week. ADP unemployment focuses our attention for a prequel on the big data feed of the week; US Non-Farm Payrolls, with Initial Jobless claims, and ISM Non-Manufacturing also noted.
It’s been a solid start to the week for the Aussie dollar with price action making a convincing break to the upside of 99 figure. Market participants appear to have found solace in the latest round of manufacturing data from China amid relief surrounding Syria after President Obama announced a congressional vote on a military strike in the region. With the U.S closed for a Labour Day holiday, it is however important to consider the implications of a liquidity drain across the majority of asset classes, which can act to exacerbate price movement.
Still the domestic data pulse remained broadly supportive of the local unit in Asian trade with building approvals, monthly and annually, outpacing expectations to climb 10.8% and 28.3% respectively, while the HSBC PMI report showed manufacturing remaining in expansion territory of 50.1, albeit by a small margin.
True to recent form, the data pulse from both sides of the channel remains supportive for the case of a European recovery, with a final revision of Euro-region manufacturing PMI edging up to 51.4 from 51.3 – the fourth consecutive month of gains. Meanwhile manufacturing in the UK appears to be on a north-bound trajectory with the CIPS/Markit PMI gauge rising to 57.2 – the strongest print since February 2011. A reading above the ‘50’ level denotes expansion in the manufacturing sector.
Still the Euro’s been unable to capitalise on the strong data pulse, falling for the fifth consecutive session against the greenback. At the time of writing the Euro is buying 1.3190 – with short-term supported noted at US$1.3180. Across the Channel, sterling once again failed to crack $US1.56 amid broad-based support surrounding the Verizon/Vodaphone deal, while interest rate pundits took heed to BoE Governor Mark Carney in his first public speech, who noted the bank stands at the ready to increase stimulus if the need arose.
Key data out of Asia today includes the official China services PMI 11am AEST, followed by Australian trade balance and retail sales at 11.30. Nonetheless, the main event in domestic trade will be the RBA policy decision at 14:30 which is widely expected to see Governor Stevens and Co hold the official cash rate at 2.5 percent. While money markets are factoring in near-certain odds of an ‘on hold’ decision, as always the finer points of the ensuing statement will be analysed carefully in an effort to gauge the banks next move. While the transition from mining to non-mining growth may remain a key concern, we anticipate the bank to express some positivity surrounding key elements which may help in the re-balancing process, such as the lower Australian dollar, and previous reductions of the cash rate which have yet to infiltrate the economy. Clearly a major determinate in business spending is the political landscape and while it may not be mentioned in today’s statement, the likelihood a majority government will be elected on September 7 also adds credence to the case for the RBA to stay on the sidelines for the near-term. At the time of writing the Australian dollar is buying 89.9 US cents.
Market participants moved to the perceived safety of the yen and U.S treasuries overnight with escalating geopolitical risk in Syrian at the fore. The potential for the United States to wade into the Syrian fray has come at the expense of risk currencies with Yen regaining some of its safe-haven lustre. The rhetoric from the U.S appears to be heading down the path of a military strike on Damascus with Secretary of State John Kerry pointing the finger squarely in the direction of President Bashar Al-Assad’s regime, describing lasts weeks attack as “moral obscenity”. While Syrian is not a major crude exporter, the potential for conflict to spill across to other major oil exporting nations in the middle east has seen supply concerns push up the price of crude oil, while Gold – seen as a safeguard against geopolitical risk – also remains well bid above the US$1,400 an ounce.
The Yen reigned supreme with its safe-haven attributes remaining well and truly in favour when the chips are down. After an attempted break of 99 Yen earlier in the week, the USDJPY pair slid, making a sustained break the downside of 98-figure and currently looking to forge new lows below 97 yen to the dollar.
The greenback’s safe-haven appeal failed to kick into gear with more moderate support against the high beta spectrum than sustained upside. After piercing the downside of 89 US cents yesterday, the Aussie slumped to lows of 88.32 US cents overnight before regain some ground over the later part of U.S trade, while kiwi downside outpaced that of its commodity bloc counterparts the Aussie and CAD. Notably the Aussie’s fortunes against the Swissie suffer a hit with the par hitting fresh 2-year lows of 0.8216 Sfr.
Data releases from both sides of the Atlantic provided some solace in an otherwise risk-off session, with the German IFO series of data beating expectations, while U.S house prices, consumer confidence and manufacturing data all managed to beat expectations. In the context of the ‘taper trade’ it would appear as the outperforming data only had a fleeting effect on the greenback with moderate strength noted in the ensuing period.
Local data today includes the HIA/CBA housing affordability index at 10am AEST, with construction work indicator at 11.30am. Both a considered to be low-tier releases. At the time of writing the Australian dollar is buying 89.8 US cents, with technical’s showing supportive behaviour at 89.3 US cents with a break to the downside encouraging a deeper trough to three year lows of 88.5 US cents.
Trade safe and enjoy your day
Yen resumes decline; Euro finds solace in Draghi
Global market moves resembled a moderate risk-on environment overnight, with the Euro recovering after a recent slump, while the U.S dollar slipped against major counterparts with exception of the Yen.
Although we’ve seen moderate weakness from the greenback overnight, we consider broader conditions favorable for further strength. Intermittent bouts of strength have been noted around solid economic feedback, which suggests a tentative return to traditional fundamentals where the dollar can rally on good news. For this we continue to look to the greenbacks relationship to the Fed’s asset purchase program.
As noted in yesterday’s report:
The greenback is in the unique position of attracting demand in two very different types of market environments. On one hand the U.S dollar retains its safe-haven attributes which can intermittently strengthen its appeal in times of adversity, while positive economic signposts have broadly worked in the dollars favour as markets attempt to define how long the fed will maintain extraordinary levels of economic stimulus. Should the data pulse continue to materially outpace expectations, we’re likely to see intermittent bouts of greenback strength as markets continue to ponder when the Fed will begin scaling back on asset purchases.
In economic news overnight, the number of U.S citizens applying for unemployment benefits fell to a six-week low of 340,000 for the week ending March 2. This comes as data on Wednesday showed a pick-up in private sector hiring, with the ADP employment gauge showing 198,000 new jobs added in February, in excess of the 170,000 expected. January’s growth originally reported at 192,000 was also revised to 215,000. The out-performance from the weekly jobless claims and ADP report are a particularly good precursor to Friday’s official employment report.
As widely anticipated, the European Central Bank kept their main refinance rate on hold at 0.75 percent overnight. The Euro bounced following ECB President Mario Draghi’s post decision address, who noted although the topic of interest rate cuts was on the agenda; the prevailing consensus was to remain on the sidelines. The Bank also expects a gradual recovery through the later part of 2013 with a balance of accommodative policy and improving global conditions expected to broadly benefit the Euro-region.
Across the Channel, the Bank of England also kept interest rates on hold at 0.50 percent with no change to the asset purchases program which is currently valued at GBP375 billion.
True to form, the most pronounced moves came from the Yen which fell across the board as investor’s unwound long exposure after the recent corrective phase. The greenback slumped against the Yen with the USD-JPY pair peaking above the 95 region for the first time since August of 2009. We also saw notable moves from the EUR-JPY cross which acted to provide some residual weakness for the Yen across the board.
The Aussie dollar crawled higher overnight coinciding with stronger equities from both sides of the Atlantic while residual support from the Euro kept the balance of risks to the upside. Yesterday’s larger than expected trade deficit failed to spur any sustained selling on the Aussie with short-term losses quickly unwound in the hours to follow.
In the absence of any top-tier releases locally, markets will be focusing trade data from China on the docket at 1300 AEDT. Traders are bracing for a slump in both import and export activity with a trade deficit of $US6.95 billion expected in February, from a previous surplus of $US29.15 billion.
At the time of writing the Australian dollar is buying 102.7 US cents.
Greenback finds form ahead of NFP’s
The U.S dollar continued its solid run overnight as investors looked to signs employment is steadily improving, amid further milestone highs from U.S equities.
The ADP employment gauge showed 198,000 new jobs added to the private sector in February, in excess of the 170,000 expected. January’s growth originally reported at 192,000 was also revised to 215,000. The out-performance from the ADP report is a particular good sign ahead of Friday’s official employment report and may also suggest concerns surrounding the impending budget cuts have failed to discourage U.S businesses from hiring.
The greenback is in the unique position of attracting demand in two very different types of market environments. On one hand the U.S dollar retains its safe-haven attributes which can intermittently strengthen its appeal in times of adversity, while positive economic signposts have broadly worked in the dollars favor as markets attempt to define how long the fed will maintain extraordinary levels of economic stimulus.
Should the data pulse continue to materially outpace expectations, we’re likely to see intermittent bouts of greenback strength as markets continue to ponder when the Fed will begin scaling back on asset purchases.
Still, there remains a level of confidence the Fed will not suddenly scale back ultra accommodative stimulus measures. Vice chair of the Fed, Janet Yellen defended the Fed’s stimulus initiatives in a speech earlier this week, noting: “I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more rapid growth in employment.” Adding, “at this stage, I do not see any that would cause me to advocate a curtailment of our purchase program.”
In short, there are a series of factors at play, and while we view feedback from the top echelons of the Fed as broadly dovish, markets continue display a willingness to look further into the future. The future is of course tighter policy from the Fed, implying the scaling back of quantitative easing as the economy regains composure.
This phenomenon (of solid U.S data translating to a stronger greenback) has been broadly negative for currencies generally considered to get a leg-up in ‘risk-on’ environments. In particular, the kiwi and Aussie dollars recorded moderate losses, and the Euro resumed a downward trajectory below the $US130-figure.
At the time of writing the Australian dollar is buying 102.3 US cents and we judge a broad band of supportive behavior from 102 US cents and above to contain losses in the domestic session. Trade balance is coming up at 11.30 am which is expected to show a deficit widened to A$500 million in January, from a previous 427 million. Local markets will also be watching for feedback from the Bank of Japan as their two day monetary policy meeting finishes today.
AUD finds it feet; Yellen defends Fed stimulus
The Aussie dollar slumped to near 8-month lows yesterday following wide-spread concerns efforts by China to curb property speculation will come at the expense of growth in the region. Selling accelerated as traders chipped away at key technical support 101.5, in turn encouraging further downside before bottoming out at 101.14 US cents.
Regional investors also got their first chance to react to Chinese data released over the weekend which showed the official Services PMI fell to 54.5 in February, down from 56.2 in January. This followed data last week which showed manufacturing growth eased in February with both the official and HSBC PMI gauges slipping closer to the ‘50’ levels, which divides expansion from contraction.
Yesterday’s building approvals fell 2.4 percent in January, short of expectations of 2.8 percent growth. Still the yearly rate beat estimates with previous upside revisions moderating the negative monthly rate, including a 3.2 percent increase in private sector approvals.
The Aussie began to slowly regain composure after yesterday’s lows, with moderate strength from U.S equities paving the way for a slow grind higher. Stimulus addicted U.S markets are responding favorably to any suggestion from key Fed officials the central bank will not be unwinding accommodative policy any time soon.
Vice chair of the Fed, Janet Yellen defended the Fed’s stimulus initiatives overnight, noting: “I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more rapid growth in employment.” Adding, “at this stage, I do not see any that would cause me to advocate a curtailment of our purchase program.”
In short, we view this as the Fed’s (inadvertent or otherwise) weak dollar policy remains intact.
We also note a small bounce across the risk spectrum after the release of the ISM New York business conditions index, which rose to an 11-month high.
AUD looks to the RBA to define the trend
It’s a big day for local markets with the RBA policy decision headlining at 1430 AEDT. Before than market will watching closely some mid-tier releases with Retail Sales, Current Account and HSBC services PMI on the docket.
Today’s policy decision is widely expected to see Stevens and Co hold benchmark interest rates steady at 3-percent, and true to form the ensuing statement will be the market mover.
While today’s statement may re-iterate the RBA’s scope to make further reductions to the official cash rate, we anticipate an overall tone of neutrality given some headway has been made in rejuvenating non-mining sectors of the economy. However the statement may also highlight challenges to the domestic economy given renewed concerns from the Euro region and the flow on effect of budget cuts in the United States. We also expect the statement will delicately respond to the latest Chinese growth concerns. At the time of writing the Australian dollar is buying 101.85 US cents.