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Australia Today - CPI a big hurdle in the Aussie dollar recovery, ASX eyes solid mining share bounce

Market Analysis /
Greg McKenna / 25 Jul 2018

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

As every Feedback is welcome

THE AUSTRALIAN DOLLAR

A day after China announced new stimulus measures to shore up its economy in the face of the looming trade war with the US (and because it already needed it) markets decided it was uber bullish news for Chinese stocks, metals and industrial commodities, mining stocks, and to a lesser extent the Aussie dollar.

That's mean the Aussie is the clear leader among the majors with a 0.53% gain to 0.7422. In truth that just gets it back to where it was before the previous day's drop of half a percent. Today’s CPI result will be important for the Aussie. 

So, after being the worst performing big currency the night before the Aussie reversed course for the half a percent gain on the back of excitement about the size and scale of what China is trying to with its stimulus and for the economy. Given the focus seems to be tax cuts I’m guessing this is more consumer orientated and so less resource intensive.

But the narrative is still of a tight linkage between Chinese growth and the Aussie dollar. So traders have bought AUDUSD as a result.

If we boil down the price action to its key drivers lately then the Aussie rally is also understandable in both the lift back above 74 cents. Copper rallied nicely, the Euro was stable, metals and mining shares surged - retraceing some of their recent underperformance against the total World MSCI index of stocks. 

But the handbrake on the AUDUSD appreciating further and a possible reason which the high of 0.7433 overnight was again below the highs of the past couple of weeks is the weakness we are still seeing in the Chinese Yuan which lost further ground again yesterday. It recovered from the lows against the USD. But directionally the PBOC and SAFE have made it clear they will not stand in the way of further USDCNY appreciation.

The question is whether traders now see this as positive for growth in China or just another battle in the trade war. You can guess my take. 

But today the focus is going to be on the release of Q2 CPI.

Given interest rates and interest rate expectations are a big part of forex moves at the moment this is a big number for Aussie dollar traders. A big number will facilitate a range break and run toward 0.7480/7500. If that gives way then the charts suggest we could even see a run toward 76 cents. A weak number would likely see the Aussie gravitate back under 74 cents toward the 0.7360/70 region.

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

ASX INDEXES

After the rally here of 38 points yesterday saw the ASX ride higher with the Asian move SPI traders have added another 16 points overnight.

It's fair to say yesterday’s rally on the ASX was stronger than expected. But as I wrote in Markets Morning earlier I underestimated the impact of the Chinese stimulus on risk appetite. And though it was a solid run higher for the ASX it was still an inside day on the physical market. Sure it was a decent range lower the previous day, but and side day below what might be a double top over recent weeks is interesting.

Of course, SPI traders have added another 16 points overnight. But like the ASX the SPI has also still had an inside day. So the oomph for new highs isn’t there just yet.

On the day, in SPI terms the 4 hour charts suggest a run above 6,229 will kick toward the next level at 6,245 and then 6,266. But if 6,229 doesn’t give way in the SPI then a run back toward 6,192 is on the offing. Heres’ the daily SPI chart – it’s clear where I am wrong.

And just quickly, if its a bigger than expected print for the CPI we might see the financial - which make up more than a quarter of the index - make some headway which would be positive for the overall market and the SPI. 

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

A LITTLE ON THE ECONOMY

The lack of credit pulse in the economy is a troubling thing given that growth and central bank policy for the past 3 decades has been all about stimulating demand and investment by lowering rates and the cost of debt. 

For me, the big issue is that we are borrowing from the future. And there is a point where we get diminishing returns on that debt and its impact on growth. That's particularly the case when the debt is built up for non-productive assets like housing not productive assets like business CapEx. Now, of course, we are seeing a recovery in business CapEx. But the issue here is housing. 

And if demand for debt (the statisticians like to call it credit which has to be a trick of language to ameliorate the impact of rising debt) is falling, and the domestic economy is down a little then that suggests also that aggregate demand isn't overly strong which in turn suggests pricing power - outside non-discretionary items - is low. 

We'll see today of course. Petrol is expected to be a factor. But I'll be interested to see what prices pressure there are elsewhere - if any - in the economy. 

DATA:

On the day the big event here in Australia for markets is the release of Q2 CPI. The Reuters poll says the market is expecting a 0.5% headline rate which will take the yoy rate to 2.2%. Similar quarterly expectations are held for the weighted median and trimmed mean measures which are expected to print 1.9% yoy. A big number would be a very big number for the Aussie and potentially rates markets. A miss shouldn’t change rates pricing but might undermine the Aussies overnight strength.

NZ trade is also out and tonight we get German Ifo business climate, conditions, and expectations. New home sales in the US may be of interest as well. That's an important indicator of underlying aggregate demand I reckon.  

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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