Australia Today - RBA crafts a superb communique, Aussie leads, ASX lags

Market Analysis /
Greg McKenna / 08 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 AUSTRALIAN DOLLAR

The shift in tone and sentiment in global stock markets which ignited in China yesterday helped buoy risk assets like copper, where the HGc3 price rose 0.73% to 2.7585, and the Aussie dollar which was half a per cent higher at 0.7418. 

The absence of negatives can be a positive.

That is what we had already seen Monday for the Aussie dollar as it held firm while the Pound and Euro dipped. So all traders needed was a little positive news as an excuse to push prices higher and the surge in Chinese stocks, lift in global risk appetite with the stocks and copper rally, combined with the weaker US dollar was all the catalyst they needed to hit the Buy button.

Of course at 0.7418 the AUDUSD is hardly strong.  

It’s closer to the top of the two-month trading range rather than closer to the bottom. That’s about all I can say about this right now. It still has to break 75 cents to really kick on. The point is that when you calculate a coincident fair value for the AUDUSD using inputs like commodities, growth, interest rate differentials and so on you end up with levels around 75 cents. But that does suggest there is room for a move toward this level given Australia’s CESI score is the best in the world right now and if the USD loses a little more ground.

But the Aussie has resistance at 0.7460/65, then 0.7480/85 and 75 cents itself. It’s still a range and I’m going to respect it unless or until it breaks, but I’m kind feeling a little – or a lot – more positive for the AUDUSD right now. Here’s the chart.    

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

ASX INDEXES

SPI traders missed the memo to buy overnight and have come back from small loses an hour or so ago and prices are now flat after the ASX 200 fell 20 points to 6,254. If we see the physical ASX down through 6,230/40 today things could get a little ugly.

A fall yesterday, and no participation in the overnight rally in global stocks is interesting.

That’s an interesting move because for a market which has been on very strong ground for the past couple of months you'd be forgiven for thinking the positivity offshore would drive prices higher.  Although I guess, like many assets right now the strong rally has morphed into a bit of a range as solid overhead resistance at the ASX200’s recent high has stalled it’s upward trajectory.

You’d also be forgiven for thinking the initial move today will be higher. Whether or not that can hold is another point, but support in the physical markets in the 6,230/40 region has to hold. In SPI terms its still a 6,145/6,267 range. Here’s the SPI chart.

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

A LITTLE ON THE ECONOMY

The RBA is masterful sometimes, yesterday they crafted a statement that signalled a downgrade to near-term inflation but also signalled to traders and investors not to get too excited about a lower inflation outlook also tipping the scales toward a rate cut. They did that with the governor signalling the inflation downgrade but by also signalling an upgrade to the employment outlook signalling that the RBA believes the unemployment rate “is expected [to fall] over the next couple of years to around 5 per cent”. The RBA also said it expects that inflation will bounce back after this current dip.

But as Westpac’s Bill Evans wrote after the governor’s statement, “In his statement, the Governor does not provide a convincing commentary that wage pressures can be expected to lift; the housing slowdown and the associated wealth effect will not be headwinds for the economy; any evidence that inflation pressures are likely to build; and why global developments are not pointing to some challenges for Australia”.

That’s pretty much the thing that popped into my mind, the “convincing conviction”. The RBA has overshot inflation expectations for some time and unemployment has been sticky in the mid 5.5% region. I hope they are right on both fronts, but 2019 shapes up as a potentially challenging year for the domestic and global ecoomies.

DATA:

On the day we get the BoJ summary of opinions, bank lending and trade data from Japan. Home loans and Westpac Consumer confidence are out here in Australia while RBA governor Phil Lowe will be speaking at the Annika Foundation lunch at 1.05pm AEST today – more colour on that inflation and unemployment change in his statement yesterday I’d bet.

Chinese trade, exports, and imports for July are also out around the same time Lowe will be speaking. Tonight it’s fairly quite in the US with mortgage applications and then EIA inventory data out for oil and energy markets.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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