US data b4 Thanksgiving

Lots of data coming out tonight b4 the Thanksgiving holiday - see calendar. My advice - a good idea to step aside - no one across the pond is going to ruin their Turkey dinner - more a case of position covering and taking risk off the table. Volume likely to be light so be careful, if you must. Sit back watch and enjoy a glass of vino.

Getting close to Christmas

Christmas time is coming and toward the end of the year activity normally slows - if youre ahead of the game you dont want to do anything foolish and those behind dont want to exacerbate. So what would this mean if the Fed hikes in December. I think a more muted response would be in order. Sure it would be bullish for the $ but as this conversation has been running for the entire year, one would think a hike has been priced in - perhaps not fully but last payrolls was a good test. Eur continues to be on a downward path and CAD has been beaten up along with WTI. Cable has been a dissapointment of late and whilst we started the year with discussion on when BOE would hike, the latest numbers coming out from the UK would suggest another long drawn out debate. The antipodean currencies on the other hand are having a little bit of a fightback but will need China to show improvement before anything sustained. Saxo notes that the SilkRoad impact could be massive on the upside for China. Keep an eye on diverging monetary policy is probably the key message here as the market continues to hang of every utterance. Why am I starting Christmas chat already - well its time to be careful of declining liquidity and expect to see some low volume high volatility moves in the coming month or two. Becareful and think about trade notionals as we get closer to the silly season and lets see if Yellen delivers the Christmas present that the market has been waiting for !

Aussie Again

I seem to be devoting alot of time to the aussie lately and its not the only pair I cover but what a day after the job report came out. Employment on a seasonally adjusted basis fell below 6% to 5.9 and the ABS reported the number of people employed increased by 58,600 to 11,838,200 in October 2015 (seasonally adjusted). The increase in employment was driven by increases in male full-time employment (up 33,500) and female part-time employment (up 24,000)

The aussie gapped up and has now closed the price leg down after the NFP last week. Employment numbers decreased the likelihood of a rate cut b4 Christmas by RBA and the aussie pairs all follwed suit. Above 7170 and we will be targetting mid 72.

screenshot_Thu_Nov_12_19.42.32

Source: 6202.0 - Labour Force, Australia, Oct 2015

Another Interesting Central Bank Day

The Fed as expected kept the rates on hold but clearly the tone has moved to a less Dovish stance. Whilst outlining the key watch items that havent really changed they have noted improvement in housing and employment holding steady as well as more confident in hitting the 2% inflation target in the medium term.

"In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."

Inflation globally is being held back for numerous reasons but energy prices is a large factor. If one believes we are at a bottom of the cycle, in fact oil surged 6% last night, then inflation could pick up quiet nicely. The US consumer based on previous economic announcements are also adding their bit by more promising consumer and retail numbers overall.

On the other side of the pacific the CPI numbers for Australia released yesterday showed a marked deterioration across all measures. This will put the rBA under more pressure to decrease rates for an economy that is struggling to shrug of the end of the mining boom - sounds like a tired record and it is but nothing has demonstrated that the economy at play is doing everything they can to improve upon this. Its not all doom and gloom but the large broking houses are now all running stories with recession in the title - whether thats will avoid or coming your way.

Glen Stevens RBA Minutes 6 October

"In Australia, the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet, with domestic inflationary pressures contained. Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate."

Aussie held today with not alot of movement after RBA minutes release showed a slightly positive tone, hinting that another rate cut may not be on the cards this coming November.

Is the Aussie RunUp Sustainable

Lets quickly have a look what caused the rise from 69c to 74c.

  1. Sqeeze on extreme IMM positioning of Short AUD
  2. Waning confidence in a Fed hike in 2015
  3. Oil & other commodities having a small bounce
  4. Weaker NFP numbers <200k
  5. New Prime Minister which normally has a ST exhuberance factor

Is this sustainable. Probably not. The Australian economy has some growing underlying weaknesses and it is unlikely that any recovery in construction + other non-mining sectors will make up for the gap left from the end of the mining boom. China soft/hard landing, which ever way, will still drag on the Aus economy and the decline in China imports of near 20% does not bode well.

Waning confidence in a Fed hike - well thats a temporary reprieve and the IMM positioning should probably confirm that whilst we may be off short AUD extremes the Longs will not take over. The NFP last week whilst down does not highlight a weakening US economy and whilst all of Yellens key dashbord metrics aren't positive they have all turned a corner.

Commodities. Thats a hard call but there is still so much oversupply coupled with low prices that even if we saw a rebound, it will be a while before any long term positive impact were to support the AUD.

Overall, Short AUD in LT is probably the right call but lets just see what Stevens does in November. If rates are cut, the AUD is likely to fall pretty fast so be careful out there and keep risk management in mind and an eye on fundamental catalyst.