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Australia Today - The Aussie dollar was hammered as the Greenback strengthened but the ASX recovered

Market Analysis /
Greg McKenna / 18 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.

QUICK RECAP

The Aussie was higher last night when the USD was under a little pressure. That saw the Aussie peak at 0.7438. But it’s back at 0.7385 – on ST support – for a loss of 0.4%. 

Looking at stocks, after a bit of carnage yesterday on the local market SPI traders have added 19 points overnight. What’s interesting about that is despite the weakness we saw in industrial metals global miners were up. So it night be a good day here on the ASX. 

A LITTLE ON THE ECONOMY

Despite the fact Australian markets seemed to pay no heed to their release the RBA minutes were an important addition to the conversation about the outlook for the economy and for rates in Australia.

I read them as tentative on the domestic economy, especially the bit which said the Board expects (my bolding), “the strengthening economy as likely to deliver further progress in reducing the unemployment rate and returning inflation to target”. Likely to deliver folks, LIKELY to deliver.

No wonder the RBA again said toward the end of the minutes that, “it would be appropriate to hold the cash rate steady and for the Bank to be a source of stability and confidence while this progress unfolds” (again my bolding).

I think the answer to my question on whether the previous use of that sentence meant, “the commentariat were getting too bearish on the outlook relative to what the RBA was saying or was it a reflection of the RBA's own concerns” has been resolved in favour of the RBA’s own concerns.

Indeed the RBA went so far as to add the comment that even though they expect the next move to be higher, “there was no strong case for a near-term adjustment in monetary policy”. YUP, no there is not.

One other thing I wanted to highlight about the outlook is that the RBA is getting concerned about house prices and the impact on consumers and consumption.

On Twitter yesterday I characterised their discussion on household debt levels as at the “outer right end of the Panglossian scale”. It’s a big discussion in the minutes, one that highlights the special paper that was delivered by RBA staff. In summary they said Australia is different from other countries – yeah I know. That he debt is held by the wealthy and thus they have shock absorbers, but still said that  “a material share of household debt is held by lower-income households, which generally have higher debt relative to their income”. So they are a little worried that “high levels of household debt could affect economic outcomes”. What was it Dr Watson used to say to Sherlock :S.

THE AUSTRALIAN DOLLAR

AUDUSD is sitting on, support after reversing its overnight strength as the USD caught the Powell wave. If you map the Aussie against the Euro on a 30-minute basis it’s pretty clear that – as I’ve been writing lately the Aussie is prone to the whim of the USD.

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

SO with nothing material out in Australia or Asia today that reliance on the USD and Euro moves is going to continue.

But lets face it the Aussie has only rallied from 73 cents because the US dollar came under a little pressure from a market now long of Greenbacks – against the Aussie and many other pairs – and the notion that data elsewhere was improving. That much is true. But what Jay Powell did last night – in contrast to what Jens Weidmann told the German Cabinet last week – is that the US economy is strong and the Fed will keep raising rates. So while I will continue to respect the 73 cent level unless or until it breaks my medium term target remains that 0.7125/0.7150 region.

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

On the day though the Aussie is trying to cling to the 4-hour up channel. So, if last night’s low ~0.7375 gives way the Aussie has support at 0.7363 and then it’s back to the 0.7300/10 region. Topside it’s 0.7395 then 0.7407/12 and 0.7425/30.    

ASX INDEXES

Stocks in Australia are in for a bit of whipsaw if the lead from futures is any guide.

After a tough day at the office yesterday where the tone in Asia and a break of technical support weighed on traders the overnight moves in US and European markets have the SPI up 22 points now.

What’s really interesting though is that even with the fall in copper and other industrial metals the big global miners – BHP, Rio, Anglo American, Vale, Glencore – were all higher overnight. Indeed basic materials was the biggest gainer of the S&P 500 stocks with a 2.04% gain. Someone – other than Jeff Gundlach – clearly sees value in the sector. And that is good news for the local market.

Technically it is an interesting juncture. While the cash CFD broke the short term support yesterday and then bounced last night back above the short term support it broke down through (remember this is essentially a combo of physical and SPI trade, not exactly but kind of). So that’s a head fake. BUT, and this is an important but, the SPI actually bounced exactly off trendline support I’ve got for it. You can see the chart below.  

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

DATA:

It’s a quiet day in Asia for data with the Westpac Leading index for Australia the only release of note. Tonight though UK inflation data – RPI, PPI, and CPI – are out along with Euro area CPI. They could move the needle on forex rates.  Tonight Powell is back on Capitol Hill giving his second round of testimony and we also get housing starts and building approvals along with the Beige Book. That might be interesting at 4am tomorrow morning.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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