Australia Today - The Aussie is up but the ASX keeps failing at resistance

Market Analysis /
Greg McKenna / 31 Jul 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 Aussie has underperformed the Euro move with a 0.10% gain but reclaimed the 74 cent region it lost yesterday – it’s at 0.7408 this morning with the bulls thankful no doubt pleased there's been a consolidation in the CNH AND CNY. 

That AUDUSD has underperformed the Euro’s move is understandable given the funk in equity markets in the US and across the globe in the past 24 hours. But that it rose back above 74 cents despite this is a testament to the heavy load the shorts are carrying in the Aussie and the longs are burdened with in the US dollar overall.  

 

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

 

Where to next is an interesting question.

But I found it instructive that the turn in mining and metals shares relative to the overall market suggests some support for the AUDUSD on an outright basis. Also, I saw on Twitter that Westpac’s Rob Rennie said the “average of fair value forecasts” for the AUDUSD at the moment sits at 75 cents. Exports and sentiment are supportive but the yield differential is a drag and “at lows back to July 2000”.

That was an awful time for the Aussie dollar and it remained under pressure until the low in April 2001 when it fell to about 0.4775.

It’s a good example that there is no one simple or single factor which drives currency markets – its why they are so hard but so much fun. And I raise Rob's comment on the interest rate differential, and his thoughts on the other fair value drivers and models, to highlight that point.

For the moment this is as much about the battle over the Chinese Yuan and the USD itself with the Euro as it is about the Aussie dollar.

Indeed the Aussie is almost a residual of the bigger moves and swings in sentiment. And that means if the Yuan stabilises, if the Euro can break 1.1730/50, and if USD longs get spooked the Aussie can rally. Maybe not today but the pressure is building.

And speaking of today the AUDUSD is right in the middle of its Bollinger bands at the moment. Very short term a dip below 0.7397 might see it back at 0.7380 while resistance is 0.7427 and then 50.

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

 

 

ASX INDEXES

In both physical and SPI terms the recent highs continue to hold. That’s not bearish per se, not in a material sense anyway. But it does suggest that there are valuation impacts holding back the overall market and that in a technical sense this is the top of the range for the moment. In physical terms the fall yesterday was of its lows, but the down candle still looks ominous. Likewise, the indecisive nature of the SPI candle after Friday’s down day looks ominous as well.

A move to 6,212 opens the way to 6200 and if that breaks it might be 6,145/60 over the next few days. Here's the SPI chart. 

 

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

 

A LITTLE ON THE ECONOMY

BUilding approvals are kind of important today. But I'll be focussed on the RBA's debt data - helpfully called "private sector credit" lest it spook anyone that Australians are drowning in a sea of debt. 

Anyway, the reason I'm interested is this data is that I firmly believe the demand for debt helps drive the overall economic cycle in Australia and across the globe. Of course the linkage might be a little weaker than in the past because we are a service based not manufacturing economy. But overall the linkage between debt and money creation and then the velocity of money moving through the economy is to me an important driver. 

Things a re slowing down here in Australia. And while I'm not running around in a flap, if the RBA does get debt growth to settle back at wages growth for the longer term that mans the potential gorwth rate of the domestic economy must come down as well. 

Throw in the wealth effect of falling houe prices, itself a result of the regulatory efforts to lower demand for debt, and we get some decent headwinds.

We'll see what retail trade says about all this Thursday.  

DATA:

Here at home today it's private sector credit and building approvals.  But it's a big day in Asia and Europe. 

The global manufacturing canary – South Korea – releases business confidence, construction output, industrial and manufacturing production, along with retail sales. We get Japanese industrial production and unemployment this morning before the BoJ this afternoon and of course, we get the NBS China PMI’s for manufacturing and services.

Retail sales are out in Germany, Euro area inflation for July and GDP for Q2. Canada releases its monthly GDP (yeah I know) as well as PPI and in the United States we get very important employment costs, PCE prices, Personal income, and spending data as well as the Chicago PMI and Case Shiller housing.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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