News and views
Risk appetite weakened slightly, with a nod to US house building data which was weaker than expected. The S&P500 fell soon after the open and is currently down 0.5%, although it does remain around the cycle highs, so that the setback of the past two days could best be described as a consolidation in an uptrend. Most commodities gained in London but reversed in NY for little net change, the precious metals, gold, silver and platinum all making new 2009 highs in the interim. There was talk of Russia diversifying reserves into gold. Natural gas fell 5.3% on mild US weather. A whippy session for US treasuries saw 2yr notes 2bp lower and 10yr notes 2bp higher, the catalyst being St Louis Fed’s Bullard reported comments that the first hike may not be until 2012. What he actually said was less dovish, but after some reflection, the market kept the steepening intact.
The US dollar index extended its consolidation around the cycle low for another day, slightly weaker from the Sydney close. EUR and CHF were the main recipients of dollar weakness, EUR rising from 1.4900 to 1.4990 in London. Higher-beta currencies underperformed, the GBP slipping 0.6% to 1.6717. The BoE minutes revealing lowerrate discussions were bearish for sterling and bullish for interest rates. JPY was quiet, ranging between 89.00 and 89.40.
AUD is little changed overall, masking a rise from 0.9293 to 0.9337 and back to 0.9270, some talk related to the Myers equity transaction keeping a lid on the currency.
NZD also formed a parabola between 0.7440 to 0.7500. AUD/NZD was contained between 1.2450 and 1.2490, showing no direction.
US housing starts fell 11% in Oct, including a 7% fall in single family starts taking them back to a little weaker than they were in June. Multiple starts collapsed a further 35% to be down more than 75% on year ago levels, probably a reflection of the difficulties developers have experienced raising funding for commercial property projects such as blocks of condos.
US CPI headline rose in line with Westpac’s 0.3% forecast; the core rate was up a soft 0.2%, and would have been much softer – almost flat – were it not for a 1.7% spike in new vehicle prices. There was nothing else remarkable in the CPI detail, but note that base effects (last year’s gasoline price falls dropping out of the calculation) are now lifting the annual CPI headline sharply (to –0.2% yr in Oct), and will add another 2.5 ppts by year end.
St Louis Fed President Bullard said that based on past timings following the last two recessions, the Fed might not be tightening policy until early 2012. He added that could mean that rates would be “too low for too long”, but his comments were initially misinterpreted as some sort of forecast that the Fed would not be tightening until 2012 – which is clearly not what he was saying!
The minutes to the Bank of England monetary policy committee meeting on November 4-5 revealed a three way split 1:7:1, with one official wanting no extension to the asset purchase (quantitative easing) program, the majority voting for the £25bn that was announced on the day, and one voting for a larger £40bn extension. The minutes also contained a “warning” to expect a possible tweak lower in coming months to the rate the Bank pays on reserves to commercial banks, in an attempt to get them to lend out more of the proceeds of the assets they are selling to the Bank in the QE program. On the UK data front, the CBI industrial survey was less weak across the key indices in Nov, but is still at troubling levels on the orders side.
The Canadian headline CPI rose to 0.1% yr in Oct from –0.9% yr, also turning sharply less negative due to energy price-related base effects from a year ago, a factor that will impact the series more over the next few months. Meanwhile the core CPI continues to hold below the 1-3% Bank of Canada target midpoint, consistent with the excessive spare capacity that has opened up in the Canadian economy.
Outlook
AUD/USD and NZD/USD outlook today: The muted and consolidative price action since yesterday means we can repeat our preferred strategy of buying on dips today, but with tight stops below recent supports. In AUD’s case, the support level would be 0.9210, while for NZD it is at 0.7310.
