RBA on tap with rate decision as all market factors pointing south for the Aussie at the moment.
MAJOR HEADLINES – PREVIOUS SESSION
- New Zealand Jun. QV House Prices fell -7.1% YoY vs. -8.1% in May
- UK Jun. New Car Registrations fell -15.7% YoY vs. -24.8% in May
- EuroZone Jul. Sentix Investor Confidence fell to -31.3 vs. -25.0 expected and -27.0 in Jun.
THEMES TO WATCH – UPCOMING SESSION
- US Jun. ISM Non-manufacturing (1400)
- New Zealand Q2 NZIER Business Opinion Survey (2200)
- Australia Jun. AiG Performance of Construction Index (2330)
- Australia RBA Cash Target (0430)
After the long holiday weekend in the US, the markets have largely picked up where they left off on Thursday - on a sour, risk averse note. Equities were down even further ahead of the US open and especially commodities have taken a beating. The 15% drop in crude prices in 4 days has been a spectacle to behold, and bonds are remaining stable in the US and on a rallying stance in Europe. All of this adds up to a strong USD and a very strong Japanese JPY. One of the sharpest movers in this environment has been GBPJPY, as GBP has found weakness on risk aversion and the dive in financial sector stocks. After trading above 160 last week, GBPJPY printed down close to the 153.00 handle in today's trade - a remarkable acceleration. So the moves in FX have fulfilled our expectations finally here in the short term - but despite the building momentum, we're still relatively within the ranges in some of the USD majors and there is plenty of wood yet to chop if we are to see the preferred scenario of an outright USD bull market again.
One of the intermarket indicators we will watch with extreme interest here to see if this move in risk aversion continues is the 200-day moving average in the S&P500 down around 885 - which is essentially the current trading level. As well, the S&P500 is displaying an extraordinarily compelling head and shoulders formation at the moment, and the action is now taking us close to the neckline of this formation. Are the big moves in some of the other markets about to break us out of the ranging doldrums in FX as well? The next few days are likely to provide the answer
The Aussie, though it is weak, has failed to develop the expected momentum on the many market factors conspiring to paint a very ugly picture for the currency. That is perhaps as some are unwilling to put all of their chips on the table ahead of this evening's important . Perhaps that event will serve as a dam break for the currency, which could accelerated further down under considering that some key technical support levels have been taken out and others are being threatened. The strong consensus is that the RBA will maintain rates at an unchanged level - but we think there is a fighting chance of a cut. If markets and commodities remain in the sour mood we have seen over the last couple of days, the moves could get very aggravated in the Aussie crosses. Be careful out there.
Though market factors by themselves were supportive of the USD, a bit of added support came in the form of some verbal intervention from Chinese authorities - who argued that it will take a long time to replace the USD as reserve currency even if it was desirable to do so eventually. There is continuous bleating around the world on the USD's status as a reserve currency and calls for the settling of trade deals in local currencies - including now from Russia. One wonders how many countries would rather hold rubles than dollars, however... The noise level on alternative reserve currency strategies is reaching a crescendo as we head into this weekend's G-8 meeting in Italy. As many have pointed out, however, the G-20 is becoming a more important body than the G-8 as it better reflects the import of new players on the world's economic stage.
The US ISM Non-manufacturing number is rather important today as it reflects the strength of the dominant services sector in the US economy. It has been charging higher since the climactic nadir in November of last year and is expected to rise to 46 from last month's 44. A disappointment will be a bitter pill for the green shoots holdouts out there. With the recent very bad consumer confidence data, it would seem that service activity might be less strong than anticipated. Stay tuned.
