Macro Morning: Aussie reverses

Europe had a good night following on from Asia’s strong performance yesterday but the US had a more volatile trade buffetted by a reversal of Republican House Speaker John Boehner’s positive comments from the day before. President Obama was also less positive but in the end the US is closing stronger.

On the data front there was a revision to the Q3 US GDP data from 2.0% at the advance estimate a month ago to 2.7% released overnight. Much of the revision was an increase in the contribution of inventories to growth which changed from -0.1% at the first estimate to a contribution of +0.77% to last night’s 2nd update. So on the face of it the higher number looks good but then we note that personal consumption was revised down from 2% to 1.4%. These are big revisions and it is easy to see why the Australian Bureau of Statisitics waits an extra month or two after the end of the quarter before it releases our GDP so that it can have a reasonable stab at GDP growth and hope to be somewhat close to the real growth number.

Elsewhere on the economic front, German unemployment rose 5000 with an unemployment rate of 6.9%. Eurozone business climate was better than expected at 1.19 versus -1.60 but industrial confidence was still negative 15.1 and services sentiment -11.9. Turning back to the US data jobless claims were marginally worse than expected at 393000 last week but pending home sales jumped sharply up 5.2% in October month on month against expectations of 0.8% so housing certainly looks to be continuing its recovery although the Kansas Fed manufacturing index was -6 versus expectation of -3.

In Europe it was a positive day from the outset as the better tone in most of Asia filtered through to Europe and every one of the European markets that I follow ended up and for the most part strongly higher. The FTSE was up 1.15%, the DAX was the worst performing market I follow but even it rose 0.78% and the CAC was 1.53% higher. Madrid rose 1.68%.

In the US with 12 minutes to go the S&P 500 is up 0.48% to 1416. The Dow is up 0.32% and the NASDAQ is up a much stronger 0.72%.

Silver is closing above the trend line we have been watching this week. Tonight is the important close given that this is a 15-16 month trendline so we’ll see. At the close silver is sitting at $34.27 oz up 1.74% while gold is higher at $1726 up 0.60%. Crude is off its highs for the day but still up 1.68% at $87.94 bbl – crude is in a sideways trade at the moment even if the moves are large ones inter-day but it bears watching to see if there is a break out sometime soon.

On global FX markets, for the Australian dollar it was a more interesting night’s trade than probably most people expected given that stocks were up but the AUD was down sharply. Having made a high  of 1.0479 near the top of the range again AUDUSD sits this morning at 1.0425 down 0.48% against an S&P 500 that is up 0.50% as I write. Correlations are hardly ever constant but the performance of the Aussie dollar needs to be thought about.

I would make a couple of observations:

  1. If you cant break a range or hold a range break as happened this week in the AUDUSD then prices often naturally reverse as counter trend or range enforcers sell
  2. The expectation of an RBA rate cut next week has increased after this week’s data with about 77% implied expectation (I hate this metric but it is observable)
  3. RBA Board member John Edwards in the WSJ overnight made the obvious observation that there is an upper limit on how much offshore investors can buy of Aussie assets given portfolio limits which might also have knocked Aussie a little lower

Technically on the 4 hour charts it looks biased back toward 1.0405/10.

Lets have a look at some Meta 4 charts from my  AVATrade platform.

EUR/USD: It is very interesting as the Euro has now tried for 5 days in a row to close above the trend line that goes all the way back to early 2011 so tonight’s close will be very important for the longer term technical outlook:

AUD/USD:  Having made a high  of 1.0479 near the top of the range again AUDUSD sits this morning at 1.0425 down 0.48% against an S&P 500 that is up 0.39% as I write. Having failed topside the bias is for a test toward 1.0405 on the 4 hour charts:

Data: In In New Zealand we get building permits this morning before a raft of Japanese data which could be market moving. Highlights are CPI, Industrial Production, PMI, housing starts, vehicle production and household spending. At 11.30 we’ll get the latest update on Australian private sector credit and then tonight German retail sales, French consumer spending and CPI. In the Americas Brazil is releasing its GDP  and budgetary position and in the US personal consumption data will be important.

Here is how the markets looked at 7.40 this morning.

Twitter: Greg McKenna.

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  1. Assuming that we get a rate reduction of 0.25% next week, and that there are pressures in both directions, I only have three easy questions.
    – Can it fall?
    – Will it fall?
    – and what will it fall to?


    • Deus Forex Machina

      PF how about

      – probably and
      – not much unfortunately so monetary conditions will remain tighter than they should be

      unless of course the RBA shocks us all with a 50 pointer but that is remote

      • That’s a pretty astute answer actually.
        A cut of 50 bps now might mean they won’t have to drop twice in 2013. A bit of shock and awe instead of bubble and squeek.

      • Take a breather Pete,

        Non-stop efforts to reinflate the housing bubble may cause you to hyperventilate

      • The Patrician – contrary to popular opinion I would gain more from a recession than I would from a bubble. However I’ve seen what high unemployment and a lack of hope can do to society, and it’s not what I want for my family.
        I have absolutely no idea why some wish it upon themselves.

      • Lack of hope?

        Spare us the hyperbole.

        When you support calls for macro prudential controls and max 80% LVR’s, your claims of altruism may gain some credibility.

      • The NZ OCR has been cut from 8.25% to 2.5% and the Kiwi is as strong, if not more so, that it has been in recent history. Tell me that cutting interest rates has dropped our dollar to help our domestic economy. The crux of the matter is that the USA wants a lower US$ to revive its own economy; in isolation if necessary. It will get what it wants. A lower A$, NZ$, Euro or anything else is not part of the plan…

      • Tend to agree – that’s what they want and they get. Expect the AU to stay high as a result? Probably.

  2. I dont see 50 bp as a goer. Looks like panic and bad forecasting by RBA and they don’t need to take the risk of a panicky look when households are the key to a smooth transition from mining capex to other(we hope) growth drivers.

    • +1 agreed Terry – it would smack of capitulation.

      We all know (except maybe Adam Carr) that interest rates are going to 2-something % in 2013 and likely staying there for a long time.

      Best the RBA do it slowly, give a little 25bps kicker going into Christmas, and then let 2013 unravel with another series of cuts.

      EDIT: oh and before I get assaulted like a Sherman tank in the Bacoge – this is descriptive, not prescriptive. I don’t like it either, but I didn’t make this mess.

    • 50bp! Geez you guys are talking things up… I reckon we will be lucky to get the 25bp – If you look at the recent rate movements the RBA has usually taken time to get a sighter of the impact.

      I know its painfull (and to some extent bull – I actually think that at some point we just walk off the jobs/consumption cliff) but what has materially changed since they held on cup day? All the data the RBA would be looking at is pretty much the same.

      The only way they could go to 50bp would be to really acknowledge that the elevation of our dollar has effectively resulted in Mr Puniverse getting into the ring with a 500lb gorilla and is about to get a belting. Are they going to do that just before christmas without a major change in the data?

  3. Can someone explain this to me. If the RBA cuts by 25, and let’s say the banks then cut deposit rates by the full 25 but only reduce the SVR by 15 (or less), will that be stimulatory for the economy? Or will the (greater) reduction in interest for people living off fixed interest outweigh the (lesser) reduction for the borrowers?

    • It’s almost Xmas – the banks tend to pass on most of the cut at Xmas – the PR is bad if they don’t.

      • Both the lower borrowing rates and the lower rates paid to savers should stimulate spending – but you can never tell for sure how the people will react. They might become fearful and save even harder – it would depend on a number of factors.
        Right now before Xmas with the economy looking ok in most peoples minds, I would expect it to stimulate spending.

      • Thanks Peter. I think you are right — the question probably can’t be answered with any certainty because of the psychological aspect.

  4. Absolutely Dr Watson-which is why cental banking is an art not a science-despite the trappings of mathmatical certainties.