Australia Today - The Aussie dollar and ASX look well supported right now

Market Analysis /
Greg McKenna / 01 Aug 2018

Welcome to my Australia Today column where I'l 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 rally in copper and base metals more broadly, the lift in basic materials stocks and a generally more positive tone has helped the Aussie dollar hold yesterday’s post-building approvals gains. AUDUSD is at 0.7430, off a high of 0.7440. 

Indeed, the battler has done best of the big currencies overnight holding closet to its high of the past 24 hours as the USD mounted a fight back against the Euro and Pound and as it held its gains against the Yen. But as I noted above, with copper sharply higher, with industrials and basic materials solid performers on the S&P 500, with the lift in trade tensions, and with stocks higher, the backdrop for the Aussie dollar wasn’t too bad. Or at least the headwinds abated for a bit.

The question of course is where to next. T

To that end it’s worth highlighting the directional correlation between the Aussie and Euro on a 30-minute basis remains robust. Not lockstep, but still extremely strong directionally. So this is still a USD story for the Aussie dollar and other forex pairs. The global PMI’s today will be important in that context but it is the Fed tomorrow morning which is the big event now before non-farms on Friday.

So, as we enter a new month, as the Aussie’s fall has stalled, and as the price gets closer to the downtrend line from the high above 81 cents I wonder if it time for a run higher or whether this downtrend is about to kick off again.

Here’s the chart.  

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

ASX INDEXES

The leap in industrials of 1.69% and basic materials rally of 0.93% is a good pointer to strength in Australia, on the ASX, today. SPI traders have added 21 points as result. That’s going to put the physical market right near recent range highs.

So, the rotation away from tech, if that’s what we end up seeing has to be good for some of the big basic materials stocks on the ASX. Doesn’t it? If the US and China are genuinely talking, if there is a deal to be made, then many of the concerns, the roadblocks, the headwinds, to global growth are removed or reduced. That’s a positive for the Aussie dollar and it’s a positive for the ASX surely.

Of course, I could be talking out my hat because if we do see the big 12 who have been leading the Nasdaq and S&P higher fall they could drag all stocks lower in a risk aversion mess the likes that Morgan Stanley is highlighting above. In many ways I have sympathy with that view more than I do my expectation the ASX will eventually trade to 6800 or there abouts in the next couple of years. But the path is never straight and recently the techs have been the best guide.

So to that end, the challenge on the recent range highs might be on again today.

A break above 6267in SPI terms would suggest a move toward 6,380 as a Fibo projection. It has to break and hold on close basis though for me to get excited. Otherwise, we are just back at the range top.

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

A LITTLE ON THE ECONOMY (actually quite a bit this morning, with some nice charts)

So yesterday saw a bounce in building approvals. But it’s the debt and money data that I want to focus on this morning. What we saw was a continued deceleration in the consumer component and housing debt. Owner Occupied growth continues to fall. But, Investor housing growth fell for only the third time in the last 30 years.

To put that in context that’s the recession we had to have, the GFC, and now. Of course this is exactly what APRA wanted and frankly what Australia needed because investors were driving housing prices to dangerous levels which genuinely would have threatened financial stability.

Source: Flano over at Curve Securities
Source: Flano over at Curve Securities

I say that because I’m a markets guy, I’m a behavioural guy, and I’m a follower of Hyman Minsky’s teachings. It would have ended very badly if investor had of extrapolated prices to infinity the way they were. Indeed there’s been some new research building on Minsky saying it is exactly these extrapolators, and the banks that fund them, who lead to recessions. So maybe there’s  one coming for Australia as demand for debt and money growth slows. But it won’t be as bad as the one we would have eventually experienced if APRA and the RBA had reined in the extrapolators.

Source: Flano over at Curve Securities
Source: Flano over at Curve Securities

And as is the way of the relationship between debt and housing, the ANZ says that means housing prices will continue to fall.

Source: Twitter Screenshot
Source: Twitter Screenshot

DATA:

On the day today we get New Zealand employment and labour costs this morning and then it being the start of the month we get the raft of manufacturing PMI’s across the globe. Here in Australia we get the AiGroup’s version. Also, out is an RBI decision on interest rates. Tonight, it’s the ISM in the US I’ll be watching closely along with where Europe is at and then tomorrow morning at 4am my time the Fed will do nothing the market is betting. 

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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