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 march of the US dollar continued. As a result, the Aussie is down 0.45% at 0.7235 and at the lowest levels since January 2017.
So it's, down, down, prices are down.
But the fall in the Aussie dollar is still pretty much mapping the weakness in the Euro and thus this AUD move is dominated by the strength of the US dollar. But I can’t help but draw the conclusion that the Aussie is also under pressure because folks are genuinely concerned about the outlook for the global economy when I look at the fall in copper and base metals and the performance of metals and mining shares relative to the market.
Of course we aren’t seeing that in US stocks.
And as I wrote yesterday morning the reality is that it’s not a full-blown crisis really unless stocks go offered. But a point Mohamed El-Erian made about emerging markets investing is also germane to trading in the AUDUSD. In the FT El-Erian wrote, “the EM asset class as a whole tends to be vulnerable to capital outflows, especially on the part of “cross-over” investors who had taken off-benchmark bets and now are returning to their natural habitat”.
That’s exactly the point I make all the time, and have for two decades, about why the Aussie is both the world’s favourite currency punt and why it's vulnerable when markets get in a funk. Folks cut positions and get back to benchmark. It's also why the interest rate spread is so important. No spread, no excuse to buy Aussie dollars.
The key here and now is markets aren’t in a funk yet. This is just US dollar strength. The outlook will darken materially if Turkey does morph into something more threatening for global markets. No reason it should, unless one or more of Europe’s banks get dragged through the mud.
So in the meantime, the Aussie just keeps on sliding. As readers know I’ve had the 0.7125/50 region in as a target for some time. So that remains the level I’m looking for.
Despite weakness in China, the Nikkei roared 2.3% higher and the ASX200 was up 0.76% to and back near the top of the range at 6299.6 – lets just call it 6,300 - yesterday. SPI traders have only subtracted 7 points despite the fall in base metals and continued underperformance of miners. Ahhh yield.
But I kind of feel like I want to say, just get on with it.
That’s my feeling this morning for the bulls who just don’t have enough ticker to push up and through to new highs on the SPI or ASX 200. Of course, their mild caution may be a result of some of those earnings results yesterday, of course, it might be as a result of their beloved banks – the yield payers – being richly valued again. I don’t know. Or maybe it’s got nothing to do with that at all, maybe it’s just our market keeping pace with the US but respecting the range highs.
That relationship is very far from perfect.
But it begs the question of whether the US is going to make new highs. But if it does the ASX can go along for the ride. But can it go first? In SPI terms, in index terms too, it’s pretty straight forward. We have a range at the moment and if that range breaks and we see a close above the top then the SPI and the ASX 200 could be away – and rocket. But you can tell from my rubbish daily calls lately I’m not on this – so don’t listen to me.
A LITTLE ON THE ECONOMY
Why the Reserve Bank thinks we’ll get any different outcome on wages in Australia when the UK has 4% unemployment and disappointing wages growth is beyond me. We’ll get the latest WPI today – hopefully I’m wrong.
We’ll also get the consumer sentiment data which I’ll be watching closely after yesterday’s NAB business survey showed that conditions and confidence continue to fall from highs. Trading and employment are certainly bright spots however.
I’m particularly interested in consumer sentiment because Alan Oster, NAB chief economist, said in his press release yesterday, “Surprisingly, the weakest levels of confidence are reported in New South Wales and Victoria. Forward-looking indicators also weakened further in the month – though remain at or above average”. Interesting. Car sales seemed to tank last month, so I’m curious if something is going on to challenge my relatively positive thesis on Australian consumers.
On the day the Bank of Indonesia’s meeting and policy decision will take on a little more interest for developed markets than usual. Not many forecasters expect a move. But if it was me with IDR near the 2015 highs I’d nudge rates a little higher in the current circumstance to make the point “ I’ve got this”.
Before that though we get the Westpac consumer sentiment data in Australia as well as what’s likely to be another disquieting wage price index for the second quarter. Chinese house prices and FDI are out and then tonight Sterling traders will be on tenterhooks for July inflation data in the UK. All forex traders will be doing likewise when the US releases retail sales and industrial production data for July along with business inventories and the NY Fed Empire manufacturing survey.
Have a great day's trading.
Chief Market Strategist
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower