Macro Morning: RBA gooses Wall St?


If you believe the reporters at MarketWatch then the Dow pushed to a new all-time high above 15,000 and the S&P closed at another new all-time high because the RBA cut rates yesterday.

At first blush that seems a ludicrous notion but when you think about it for a second it actually makes a lot of sense. The rationale I think would run that if the miracle economy down under is in need of a rate cut with more to come then the odds of the ECB joining the Fed, BoJ and BoE in the QE party are increasing and the chances of a Fed exit anytime soon are lessened materially. Under this scenario and with the rally needing bad news to knock it rather than good news to feed it at the moment the chances of more upside continue. As disquieting as that is for me given the overall economic reality that an RBA cut suggests for Austrralia and the globe.

The RBA got it right yesterday cutting because the economy needs it and because the Aussie dollar is too high relative to the underlying fundamentals of the economy. I think a big part of the decision – indeed it is my sense the largest part of their decision is the Aussie dollar and perhaps the piece written by the currency strategy team from the NAB, which showed that the fair value for the Aussie is currently in the 0.99/1.05 range but only – yes only-  because they have recalibrated their model (with the help ironically of a fellow, Dr Leo Krippner, from the RBNZ) to take into account eh Fed’s QE. When this is withdrawn the Aussie could fall up to 20 cents.

This is the first piece of academic style concrete evidence that the Aussie is really being goosed higher by the actions of a predatory Fed policy of begger thy neighbour and however the G7 allows the Fed and the BoJ to characterise current monetary policies it seems to me that the RBA is awake to it finally. Indeed as I noted in yesterday morning’s piece:

 if the RBA really believes that the Aussie dollar has not reacted to fundamentals the way it has in the past or should now then today is the perfect opportunity to press home their point. By cutting today when the outlook for the Aussie has soured a little and when markets are starting to question the miracle economy, the RBA can relieve some of the Aussie dollar pressure. If they word their statement correctly they can get the twin benefits of a rate cut and a dollar fall for a significant easing in monetary conditions across the economy.

They did and they have and in signalling that they are open to continue to cut the market will get their message. The Aussie may not crash but rallies are more likely to be sold than any time in the past 2 years now.

So clearly the Aussie is partly the target of this action to take rates to a modern day low of 2.75% and they may be a little disappointed but as you can see in the chart below the Aussie has some serious range bottom support around the 1.0115/20 region so to get within 40 points is fairly close in the big picture.

aud, audusd, australian dollar, australian dollar price quote, audusd daily

I am still short but the 4 hour charts suggest that a rally back toward 1.0220/30 could be in the offing and maybe the Aussie’s outlook will hinge on the outcome for the employment report tomorrow where the market is, according to FXStreet, looking for a rise of 12,000.

Crucially for Australian interest rate markets, for the Aussie and for Australian bank stocks, the RBA is saying that it will likely also need to cut again. It has been my view since late 2011 when I was Treasurer of an ADI that rates would need to fall to 2.5% given the outlook for the economy and my read of it. Not many people were listening then but with only 25 points to go I have to admit that unusually I am thinking of putting my terminal forecast even lower given the outlook, perhaps 2%.

Turning back to stocks for a moment the FTSE was higher on the back of bank shares closing up 0.55%, the DAX was buoyed by the much better than expected German factory orders which were up 2.2% against the -0.5% that was expected by the market. The CAC was 0.36% higher while stocks in Milan and Madrid rose 1.54% and 0.47% respectively.

On FX markets the better German data kicked euro higher initially driving it to a high of 1.3131 but this was unsustainable as you can see in the chart below and the euro is trading at 1.3077 this morning and clearly wanting to test support of the trend line below which comes in below the recent range of 1.30-32 at 1.2988 today.

eur, eurusd, euro, euro (eur) price quote

On other FX markets USDJPY turned lower from near the highs of the recent range from a high of 99.43 last night to sit at 98.98 this morning. USDCAD is still headed lower and is just 45 points above our target of parity and big trendline from September 2012 that comes in at 0.9995. Sterling turned down as we noted it might in yesterday’s Morning Call but found support at out fast moving average which often happens – a break of this level which corresponds to 1.5444 this morning would signal a deeper move.

gbp, gbpusd, sterling, pound price quote.

On commodity markets crude drifted off a little down 0.64% to $95.54 Bbl, gold reversed from our sell/resistance zone again falling $19 to $1448 oz and silver was 0.651% lower to $23.85 oz. Dr Copper was off  a little falling 0.24% while the Ags were much more quiet than the previous night with corn down 0.33%, wheat up 0.94% and soy beans up 1.32%.


The RBNZ Financial Stability report is always an interesting read an is out today as is the Chinese Trade data which will be influential for the Aussie dollar and Industrial Production in Germany will be important tonight. We expect that the German IP data might mirror the Chinese trade data. In the US it is once again a quiet night.

Twitter: Greg McKenna

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  1. some should get out and get fresh air, ” 0.99/1.05 range” as fair value is ludicrous.We really need this 20% drop, we are already borderline deflation and many non mining exporters are at their last breath.

    • Deus Forex Machina

      Fair value is really a misnomer but I can’t think of a better way to characterize it – perhaps theoretical value???

      All it does is generate a coincident value for a currency or asset price price based on observable drivers with a statistical significant relationship with the currency or asset being valued.

      Some drivers will have more inflaunce than others but as a total “model” they will be a good coincident predictor.

      So fair is not really the right word to use but hopefully i have explained things a little better