Zoom into Australia's housing market and the Aussie

Forex News and Events:

The rising house prices are under the scope of lawmakers in the majority of G10 countries. The troubling expansion of mortgage markets is mostly due to low-rate policies and lead to significantly high house prices. We cite the UK, New Zealand, Norway, Denmark, Sweden and Switzerland amongst the most concerned by the fattening real estate prices. The governments of above-stated countries have been putting in place the so-called macro prudential measures in order to cool down the housing markets.

Australia is experiencing a similar issue with its household debt reaching a 25-year high reports Bloomberg News, the average mortgage is said to be equivalent to 4 folds of the household income in 80% of cases. However, we know that the Australian government is comfortable and even supportive of growing housing prices in order to transfer jobs from mining to construction sector. RBA Governor Stevens confirms stating “If we think there is a need for higher construction which we do, an environment of declining prices is probably not conducive to that outcome”. Australian will to enhance the construction/housing market however carries important financial risks for the economic recovery and the financial stability. While Australian policy makers previously sounded in favor of micro-prudential action behind closed-doors, in his latest speech in Hobart on July 3rd, Stevens didn’t rule out the possibility to introduce macro-prudential measures (as limits on lending, or higher capital requirements) to temper the overheating mortgage debts.

What is the implication for Steven’s policy?

The shift in Stevens approach raises the question of the potential impact on the RBA policy. The Swiss experience showed that the macro prudential measures have been quiet inefficient over the past year, in the absence of alternative opportunity for households to benefit from the zero-interest-rate environment. If the Australian government becomes, at its turn, concerned about an out-of-control expansion in its mortgage debt and real estate market, it will only boost speculations on hawkish RBA expectations. As it is the case in countries experiencing similar issues. A fresh example is the Bank of England’s plans to introduce an inflation measure including the house prices and to move toward a revised inflation target. Such modification will certainly impact BoE’s interest rate path in favor of the hawkish camp.

Back to Australian case, Stevens doesn’t see any alarming situation in country’s growing debt for the time being, yet the question is likely to keep the RBA hawks alarmed moving forward. Whereas given the particular setting in the Australian economy, Stevens is most likely not ready to take any concrete action in the foreseeable future.

Aussie gains should remain limited

RBA’s commitment to the “period of stable rates” in one hand, the raising concerns regarding the real-estate / mortgage market on the other hand, keep the direction unclear in AUD-complex. Since RBA’s neutral shift in February, AUD/USD gained almost 10%, while the three month risk reversals are still priced at five year highs. May-July ascending triangle continues suggesting a re-attempt toward 0.9500/05 (Fibonacci 76.4% on Oct’13 – Jan’14 drop). Further upside is not ruled out depending on the global USD-appetite. However, the forward curve still trades at discount in line with RBA divergence with policy normalization bets vis-à-vis the Fed.

Versus the kiwi, the three month forward premium hits the highest since January 2009, as well as the underlying three month cross currency basis. After roughly 5 years of negative cross basis (meaning stronger preference for NZD with interest pick in 2011), traders’ interest is seemingly back to the Aussie. This partially explains the forward premium. Despite hawkish RBNZ/ dovish RBA divergence, AUD/NZD analysis favors the bull-side. In the short-run, the pair tests 1.1040 (50.0% Fibonacci on Nov’13 – Jan’14 drop), more resistance is seen toward 1.1088 (year-to-date uptrend top). Decent option barriers cap the downside at 1.1000 for the week ahead.

Today's Key Issues (time in GMT):

2014-07-29T13:00:00 USD May S&P/CS 20 City MoM SA, exp 0.30%, last 0.19%
2014-07-29T13:00:00 USD May S&P/CS Composite-20 YoY, exp 9.90%, last 10.82%
2014-07-29T13:00:00 USD May S&P/CaseShiller Home Price Index NSA, exp 171.25, last 168.71
2014-07-29T14:00:00 USD Jul Consumer Confidence Index, exp 85.5, last 85.2

The Risk Today:

EURUSD has broken the key support area defined by 1.3503 (see also the long-term rising trendline from the July 2012 low) and 1.3477 (03/02/2014 low), confirming an underlying downtrend. The bounce is thus far unimpressive, as prices remain near their recent lows. Hourly resistances can be found at 1.3485 (24/07/2014 high) and 1.3513 (21/07/2014 low). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. Downside risks are given by 1.3379 (implied by the double-top formation) and 1.3210 (second leg lower after the rebound from 1.3503 to 1.3700). A strong support stands at 1.3296 (07/11/2013 low). A resistance lies at 1.3549 (21/07/2014 high).

GBPUSD is moving sideways near the significant support area defined by 1.6953 and 1.6923. Even though the failure to hold above the resistance at 1.6998 (25/07/2014 high) suggests persistent selling pressures, the aforementioned support area is expected to hold in the short-term. Hourly resistances can be found at 1.7054 (24/07/2014 high, see also the declining channel) and 1.7118 (18/07/2014 high). In the longer term, the break of the major resistance at 1.7043 (05/08/2009 high) calls for further strength. Resistances can be found at 1.7332 (see the 50% retracement of the 2008 decline) and 1.7447 (11/09/2008 low). A support lies at 1.6923 (18/06/2014 low).

USDJPY continues to improve after the break of the resistance at 101.86 (see also the declining channel), as can be seen by the break of the short-term symmetrical triangle. Hourly supports can be found at 101.72 (25/07/2014 low) and 101.60 (22/07/2014 high, see also the rising trendline). Other resistances stand at 102.27 (03/07/2014 high) and 102.36. A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. However, a break to the upside out of the current consolidation phase between 100.76 (04/02/2014 low) and 103.02 is needed to resume the underlying bullish trend. A major resistance stands at 110.66 (15/08/2008 high).

USDCHF has broken the key resistance at 0.9037, suggesting persistent buying interest. Hourly supports can be found at 0.9031 (intraday low) and 0.9001 (intraday low). Another resistance lies at 0.9082 (03/02/2014 low). From a longer term perspective, the bullish breakout of the key resistance at 0.8953 (04/04/2014 high) suggests the end of the large corrective phase that started in July 2012. The long-term upside potential implied by the double-bottom formation is 0.9207. Furthermore, a break of the resistance at 0.9037 would favour a second leg higher (echoing the one started on 8 May) with an upside potential at 0.9191. A strong resistance stands at 0.9156 (21/01/2014 high).

Resistance and Support: