A$ looks to US stocks for inspiration; RBA minutes on tap

The domestic week ahead will see Tuesday’s RBA minutes take centre stage, and true to form local pundits will be looking closely for any sign to help the case for a December rate cut. As of Friday, interbank cash rate futures imply a 64 percent chance Stevens and Co will slice 25bps from the official cash rate.

After keeping the official cash rate steady at 3.25 percent on Melbourne Cup day, the ensuing statement reiterated the banks view resource investment is likely to peaking in 2014, and at lower levels than previously expected. Notably, the statement reversed October’s delicate downgrade of China, stating: “recent data from China suggest growth there has stabilised.” While acknowledging the recent stronger than anticipated inflation pulse, the bank expects consumer prices to remain within the confines of the medium-term target, despite the introduction of the carbon tax. Nevertheless, it also noted the high Australian dollar’s role in dampening inflation may be waning, and while softer labour market may act to keep inflation pressures contained, improvements in productivity will also be required to keep price pressures in check. While there appears to be no inflation alarm bells sounding, the statement justifies the decision citing more positive global conditions and slightly higher than expected inflation data. This demonstrates the board are a little less relaxed on inflation front than displayed in recent correspondence. The use of the language rates are appropriate “for the time being,” is perhaps another way of saying ‘we’re ready to cut rates, but we’ll see how things pan out of the next month’.

Also on the docket this week is the conference board leading index (Monday), the Westpac leading index (Tuesday) followed by the HIA Housing Index and DWER internet skilled vacancies (Wednesday). Also in focus this week will be Thursday’s HSBC China flash manufacturing PMI.

From a technical perspective, bearish momentum set in last week with a break to the downside of the 200 DMA (103.2 US cents) in the latter half of the week, before moderate gains from US equities assisted the Aussie post a stronger close on Friday at 103.39. Still, it’s apparent the local unit is once again adhering to sentiment barometers such as the S&P500 after period of detachment. We anticipate this correlative value will get stronger in the week ahead, with local factors such as the RBA minutes to provide a distraction from broader risk trends both sides of the Atlantic.

Fiscal cliff and housing to dominate US week ahead

The macro week ahead in the United States will see the health of the housing sector under the microscope with existing home sales, housing starts and building permits scheduled for release early in the week. Fed Chairman Ben Bernanke will speak at the Economic Club of New York Wednesday alongside closely watched releases with weekly jobless claims, Markit preliminary manufacturing PMI, University of Michigan consumer confidence and leading indicators data.

Meanwhile, fiscal cliff negations between President Obama and his republican counterparts will remain a key directive of risk sentiment. US stocks were able to squeeze out moderate gains on Friday as investors eyed tentative progress on fiscal cliff negations after a meeting between Obama and congress leaders. House speaker John Boehner – a key player in the ham-handed debt ceiling negations of 2011 – labeled the meeting “very constructive,” noting the meeting was “consistent” with calls from Obama to take a fair and balance approach to the negations. The conciliatory feedback from Obama and congressional leaders has provided a sense a solace for investors, however, it’s clear any positivity seen is tentative at best until a deal has been struck.

Markets will also be watching tensions in the Middle East with Israel launching an offensive against the Hamas led Gaza last week. Although the tensions could promote nervousness across global markets, the implications for crude prices will be the key factor, with the region supplying around 20 percent of the world’s crude oil. Although conflict in the region will continue to promote supply concerns, lower demand and ample supply is expected to negate price pressures. Nevertheless, should we see tensions escalate significantly; the US dollar will be caught between its natural safe-haven properties and its inverse relationship to key commodity prices, with a crude a major directive.

US markets will be closed on Thursday for Thanksgiving and will close early on Friday.

Markets wait with baited breath as Euro-group/IMF decide on Greece

Another week has passed and markets have yet to receive clarity over Greece’s much required 31.5 bailout installment. Euro-group finance ministers and the IMF’s Christine Lagarde will meet in Brussels on Tuesday in an effort to build a consensus over the time frame Athens has to reduce their budget deficit. Last week Lagarde raised concerns over the Euro-group decision to extend Greece’s budget targets by two-years, giving Athens until 2022 to reduce their debt to GDP ratio to 120 percent.

Investors found solace in reports Germany advocates giving Greece more than the 31.5 billion euro installment.  It is clear Greece has jumped through the hoops set by the troika, hence, there is no reasons to suggest the funds are not forthcoming. An article in German publication Bild took it a step further this week suggesting Germany was in favour of giving additional funds to Greece by bundling current and future bailout installments. The report suggested over 43 billion euros could be forthcoming, made up of 31.2 billion euro’s due for the second quarter, 5 billion for September and 7.2 billion due at the end of December.  Although this has not been confirmed, the reports are considered to have substance, and take some of the uncertainty of Greece’s funding commitments in 2013. The economic week ahead will see Germany take the stage with producer price data on Tuesday docket along with the final revision to third-quarter GDP on Friday.

Yen Assassination – Leadership contender calls for “unlimited” QE

The big moves of the week came from the Japanese Yen, with the safe haven unit materially weakening after Prime Minister Yoshihiko Noda declared his intent to dissolve parliament. The Yen continued its losing streak on Friday after Noda followed through, making way for a messy political battle ahead of a December 16 election, which is tipped to see a coalition government formed with Liberal Democratic Party leader and former Prime Minister Shinzo Abe expected to take the reins. Last week Abe made clear his intension to reinvigorate the Japanese economy with “unlimited” quantitative easing.  “The BOJ must set a new inflation target and print unlimited yen to achieve it. That’s something similar to what the Fed and the ECB are doing. Only then would BOJ steps have a big impact on markets.” Abe stated in a news conference. To the joy of Japanese exporters, the Yen recorded a solid 2.5 percent hit against the greenback last week finishing the week just shy of a 7-month low at Y81.32. The week ahead for the Yen will be guided by risk trends abroad, expectations of further monetary easing surrounding Tuesdays Bank of Japan policy decision, and policy implications should the LDP party emerge clear winners in the race for government.