Australia Today - ASX capitulation might not be over, Aussie dollar stronger

Market Analysis /
Greg McKenna / 22 Aug 2018

Welcome to my Australia Today column where I'll have a look at some economics, the Aussie dollar, and the outlook for the ASX200 and SPI. 

As every Feedback is welcome


The Aussie dollar’s lockstep move with the Euro has lost some of its tightness. In no small part that’s probably because yesterday’s leadership vote seems to have settled nothing for the rabble currently running the country. AUDUSD is still up 0.34% though at 0.7365 off a high of 0.7381 overnight.

Everyone and their dog was onto me yesterday to say something bad about the Australian dollar on the back of the hopeless political turmoil we are in once again. But what I said to them I will repeat here now. Politics does not often impact the Australian dollar. There have been a couple of instances where it has – a budget impasse a couple of decades ago springs to mind – but for the most part the AUDUSD just goes about its business.

That’s because traders see the RBA and the overall economy as far more important than the machinations of Canberra.

Indeed I was chatting with a journo mate yesterday and noted that an early election might cause a little ripple but otherwise, it’s been 10 years of economic stability while the politicians in Canberra have moved the deck chairs on their respective Titanic’s.


Click on me, I'll expand
Click on me, I'll expand


And so it this morning that the AUDUSD is at 0.7361 as the Euro rises and the USD weakens. Where the impact is seen is in the underperformance to the Euro, GBP, and Kiwi overnight. And there is a fair chance in this environment and with US futures selling off on the Michael Cohen news that the trendline from the 81 cent+ highs attracts sellers again.

Click on me, I'll expand
Click on me, I'll expand


It was an absolutely appalling performance of the ASX yesterday.

It’s not that the 61 point fall was unexpected. I suggested a retest of the break in this note yesterday. It’s just the selling was so aggressive and came much faster than expected. That’s what uncertainty of political leadership and the impact that will have on business and consumers can do to sentiment. Overnight though even a new record for the S&P 500 couldn’t perk up the spirits of the bulls. The SPI is down 19 points as I write. Politics here and in the US hey, :S.

Indeed, what an utter capitulation.  Sure BHP seemed to disappoint folks despite the record dividend – behaviourally I’d suggest perhaps because – but the fact that we had a broad swathe of the ASX and 11 ASX sectors lower yesterday tells you the sellers came from everywhere.

Why? Canberra would be my best guess.

The type of instability we saw yesterday, continued overnight, and is either likely to end in a snap election or new Prime Minister leading toward defeat is the very type of uncertainty investors hate. Sure it doesn’t bother the Aussie dollar. But that’s because the RBA is more important to traders than the government of the day. But to stock investors potentially faced with months of uncertainty for business and investors, it’s clearly a point of concern.

That’s even more in evidence with the SPI’s inability to follow the US market higher overnight.

We could see the caution unwind today of course. But if you were an investor with money in the market at 10 year highs and political instability likely to hurt growth here in Australia what would you do? More tellingly would you put fresh cash to work. That’s what’s going on. How long it lasts would be just a guess from my rhetorical self – I’m not sure.

On the charts though. I wrote yesterday “perhaps we need to retest the break to see if the buyers are still keen…That wouldn’t surprise, it’s often the case that a break needs to see support held on a retest for the second wave of buyers to then enter the fray with a little commitment. We’ll see in the next couple of days I guess”.

But not for a minute did I expect all that move to happen yesterday. That the SPI didn’t even pause at the 6,267 support I’d highlighted and that price didn’t recover overnight despite a rise in the US and Europe speaks to the destruction of the bull case for the moment. The 4-hour charts suggest the SPI needs to rise back above 6,275 for the outlook to improve.  6,238/39 is key before a a move toward 6,182 could be on. But this is knee jerk Cohen news so we’ll see.

Click on me, I'll expand
Click on me, I'll expand


I’ve said what needs to be said about the economic impact in the ASX section. But I would simply add again uncertainty is poison in an economy. It’s doubly bad when households are already suffering from reduced optimism about their future, their finances, their house prices, and their debt levels. The Libs need to get this sorted otherwise the economy is going to dip, possibly hard.

Oh and worth mentioning that Westpac’s Bill Evans says rates wont be raised till at least 2021.  Might be a chance they get eased before that even though the RBA governor again reiterated that the next move is up. He did it in the context of Panglossian borrowers who’ve never experienced a rate rise. He’s worried about complacency and financial stability of course. Quite rightly too. The price folks pay for a house isn’t necessarily what it’s worth.


On the day we get retail sales in New Zealand which might be interesting for Kiwi traders and then we the Westpac leading index and construction work done here in Australia along with a speech from Guy Debelle, RBA deputy-governor, on low inflation!!!! That’s at 1.10pm AEST. Retails sales are out in Canada and them its existing home sales in the US, EIA crude data, and then the FOMC minutes are released at 4am my time tomorrow morning   

Have a great day's trading.

Greg McKenna

Chief Market Strategist

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