Australia Today - The environment is darkening for AUD assets

Market Analysis /
Greg McKenna / 05 Sep 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 Aussie is also lower by 0.4% as copper dips again and as the USD pushes higher – AUDUSD is at 0.7181. It’s done half okay I think because Q2 GDP today is expected to be reasonable at 0.7% qoq and 2.8% over the past year.

The market is heavily skewed with positions and expectations to the down side for the AUDUSD on a medium term basis. That is providing fodder for opportunistic traders when we get events that open up the path of least resistance topside. Take yesterday’s RBA announcement. There was nothing in it most folks thought, there was zero expectation of a cut, I’m about the only one who thinks it read dovishly, yet the AUDUSD shot higher by about half a cent.

There was nothing in that move expect the absence of sellers. The question today with the expectation of a solid 0.7% print for Q2 GDP if we may see that type of ramp again or if that price is baked in and any weakness will get punished.

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

It’s hard to tell.  But it is worth recognising that on short term dynamics the Aussie is priced about right based on the copper fall this week and maybe a little overdone based on the Euro move which suggests around 72 cents. SO we might see a ramp. But this is not an environment where the Aussie dollar thrives – whatever the positioning.  

Looking at the actual AUDUSD chart then and we saw a bearish engulfing candle yesterday which suggest further downside. I’m targeting 0.7125 then 0.6994 (eventually).

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

ASX INDEXES

And the weaker AUDUSD effect seems to be lost on SPI traders this morning who have knocked another 19 points after yesterday’s 18 point loss. Metals and mining are underperforming again and it was a sea of red on base metals so maybe this isn’t a big enough discount.

Speaking of base metals, copper lost 2.49% to $2.58 in HGc1 terms last night while most other base metals were down in Shanghai and London trade. It all fits the EM, growth, market funk narrative folks. US stocks are just not getting the message – or, more correctly that’s actually the safe haven right now.

So, as we saw with yesterday's fall and the overnight move - in this environment the ASX can diverge from its US lead. 

It’s been a tough couple of days for the market and the uptrend channel must hold.  

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

A LITTLE ON THE ECONOMY

Hi-horse alert. 

Here’s a question for you. If the Royal Commision - and Westpac’s fine yesterday - showed that banks didn’t take their responsible lending checks seriously and expenses weren’t checked the way they are now, isn’t there a chance - a big one - a lot of borrowers might be locked into their current lender? I think there is.

So when I hear the RBA governor say, as he did in Perth last night, “I would note that some banks have increased their mortgage rates recently in response to somewhat higher interest rates in short-term wholesale markets. A much less remarked upon fact is that the average mortgage rate paid in Australia has fallen since August last year, as lenders have increased their discounts. I encourage anyone with a mortgage to shop around: there are some very good offerings out there. We can all play a role in promoting strong competition in our financial sector by shopping around and taking advantage of the good deals that are out there,” I just want to scream.

This is a big part of why the demand for debt he keeps talking about as a driver for house price falls is  linked. Anyway, we’ll all just have to deal with Lowe’s Panglossian approach to housing and borrowing in time. Oh, and what was it Ben Bananke once said about housing in the US

Rates were kept on hold yesterday at 1.5% for the umpteenth time in a row as the RBA waits and hopes that thinks will improve. I’m not for cutting rates, I don’t think it will help. Rather I’d like to see individual tax cuts, the roll back of middle class welfare, and reduction in negative gearing as a way to return money to citizens without encouraging them to take in more debt. 

Source: Twitter Screenshot
Source: Twitter Screenshot

But I disagree with those who say the changes to the statement were only cosmetic. Words are powerful and if you look at this parsed document from IFM’s excellent Alex Joiner you’ll see some important language changes. Ones that tell me the RBA is more hopeful than certain things will improve. 

The issue I have is if they were a little less sanguine and a little more realistic perhaps we’d see politicians look at better policy prescriptions. Sorry, I wandered off into a fair take there didn’t I. 

GDP is out today. The Reuters survey says 0.7% is expected, the RBA says the data will confirm above trend growth. But look at the per capita number and then you’ll see why the pie may be getting bigger but people feel their slice is smaller. 

DATA:

On the day Australia’s Q2 GDP is the key event here at home with expectations of solid growth high. It’s also services and by extension composite PMI day around the globe. China will be important this morning, but so too Europe, Japan, Korea and EM economies. Retail sales in Europe are out tonight along with US and Canadian trade data before the big one with the release of the Bank of Canada’s interest rate decision. I’m expecting governor Poloz and his colleagues to keep rates at 1.5%.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

The information provided here has been produced by third parties and does not reflect the opinion of AxiTrader. AxiTrader has reproduced the information without alteration or verification and does not represent that this material is accurate, current, or complete and it should not be relied upon as such. The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted

More on this topic

See More News

Open your account. Trade within minutes.

Start your trading journey with a trusted, regulated, multi-award winning broker.

Open Account Try Free Demo