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Australia Today - Aussie firm, ASX flat, and a a discussion of how bad housing might get

Market Analysis /
Greg McKenna / 09 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 initially went with the Kiwi (after the RBNZ dovish hold) but it’s recovered to 0.7432. I’ve just done a number of presentations over the past couple of days on the outlook for the economy, housing, and consumer and I’ve come to the conclusion that like the RBNZ the RBA won’t be raising rates in 2019 and maybe not in 2020 either.

For the moment though the Aussie is holding up because it hasn’t been hit by any fresh bearish news recently so the selling has abated. RBA governor Lowe has been very careful not to suggest rates will fall while also saying they won’t rise anytime soon, and of course the recent solid rally in iron ore and stabilisation in copper and other base metals has also helped.

That’s set up a slightly bullish bias for the Aussie.

But the reality is it’s still trading the range and unless or until that range breaks I’m not going to get too bullish. But if we do see 0.7460/80 give way we could see a run to, perhaps above, 76 cents.

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

Medium term, if you look at what I've written about the local economy below you'll get a sense I still see the Aussie lower in time regardless of the short term setup. 


The wash up of the competing move in offshore markets is that after the ASX rose 15 points yesterday SPI traders for the second day in a row have prices flat to where they were yesterday afternoon.

Like the Aussie and so many markets local stocks are ranging.

Granted the physical ASX is up near 10 year highs still. But so far it’s been unable to get up and through those peak prices and with the offshore moves overnight a little downbeat it might be time for a down day. In SPI terms the price is actually higher on the day but price ended in the bottom third of the bar, so the bears won the day. But as I said its still in a range – 6,145/6,267. My sense is we test lower.

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


Governor Lowe spoke on demographics and monetary policy yesterday.

On the first longer term topic, he was pretty upbeat noting Australia has taken in a large swathe of younger folk which means our average age of the population has stayed relatively low compared to other developed nations. That’s good news as it means these new Australians have a long period of productive life to give to the nation.

On the second topic, he said the most likely next move in rates is higher, but that he’s not persuaded by arguments it should be anytime soon.

Part of that is while the RBA is forecasting employment growth to help drive unemployment to 5% it's not really expecting the labour market to tighten enough to materially lift wages growth. So with housing prices still falling and with demand for debt likewise dropping the headwinds consumers are feeling won’t abate anytime soon.

That’s important.

And as I highlighted in the Aussie dollar section above even though I’m generally optimistic about the resilience of Australian consumers my look at housing and the changes coming to 30% of the stock of housing debt as it switches from interest only to principle and interest I wonder if this optimism – shared by the RBA – is misplaced.

Indeed if you throw in APG223 locking people into their current mortgages and many folks out of getting one the reality is house price falls could continue longer than many expect.

Here's a chart of the relationship between demand for debt and house prices - pointing lower. 

Source: Curve Securities
Source: Curve Securities

And here's one to challenge the notion that we don't need to worry about housing debt because most of it is held by wealthier, higher income, households. The correlation between luxury car sales and house prices is the wealth effect writ large. The collapse in luxury sales, which you should note started before the house price falls, suggests that the "wealthier" households are themselves feeling the pinch. They're the ones carrying the debt folks. The ones we are alsway told not to worry about. 


Source: Commsec via Business Insider
Source: Commsec via Business Insider


We get machinery orders in Japan as well as Chinese PPI and CPI data. The ECB releases its economic bulletin, Canada releases housing data and then tonight besides jobless claims we get PPI data in the US.

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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