Macro Morning: Big day for the Australian Dollar

morning1211

It is a huge day for the Aussie dollar today with the release of the CPI which is the single most important data point I reckon for the markets expectations or otherwise for RBA cuts, or not.

Obviously the Aussie’s life is not entirely its own as all currencies are buoyed by the weaker US dollar in eroding taper expectations. H&H and I have had an ongoing debate about this and he may be right that the taper is never going to happen because the data just won’t support it. The recent flow of data is certainly on the weaker side. Indeed last night’s print of the Richmond Fed Manufacturing index at -11 was 18 points weaker than the expectation of +7 so the USD came under heavy selling across the board.

aud, audusd, australian dollar, australian dollar price quote, audusd 4 hour

This has pushed the Aussie up to the top 10% or so of the 90-93.30/50 cent box it has been trading in for a while now and within a clear region to sell with obvious stops.

This is a fraught position because today sees the release of the release of the Q2 CPi with the market expecting a year on year outcome of 2.5% and a headline for the quarter of 0.5%. O.5% is a run rate of 2% per annum if you annualise it so it might be difficult to get a number that is significantly lower which in the context of the current market means that the Aussie at or near the top of the box and with current positioning might be poised for a big break higher.

It is worth rehashing what I wrote in the weekly

Australian CPI and TDMI YoY

“the inflation outlook that says that the RBA has room to move. Readers know I don’t agree with Milton Friedman I think inflation is everywhere and always an aggregate demand phenomenom. Sure sometimes losts of money in the system with the ability to borrow leads to increased inflation through increased demand but as Steve Keen writes if the ability to take on more debt is absent then there is no debt multiplier and so weak aggregate demand in Australia as Australian’s focus on paying off their houses and down debts is unlikely to see inflation rise – even if the Aussie falls.

So if the TDMI inflation gauge is a good guide of the CPI data to be released this week, then we are unlikely to see any impediment to an RBA cut…

So the weak employment we have seen since the RBA meeting and the monthly and bigger and scarier quarterly NAB Business surveys to me suggests that the outlook is such that the economy does need stimulus. The Aussie is also not in free fall any more so a cut will see it drop but perhaps not cascade lower as it might have if a July cut had of been delivered.”

Which leaves me with a dichotomy between my fundamental view and my technical view if 0.9330-50 box top breaks.

But fundamentals are just part of the story as are technicals and as is the USD.

So, if the box top breaks then just like gold we’ll be look for a big move – 0.9600/50. But unless or until the box breaks the Aussie is in the sell zone.

Elsewhere overnight stocks were buoyed initially by the misinterpreted comments by Chinese Premier Li Keqiang which said that China needs to hit 7% growth to achieve its goals of an “inclusive” society by 2020. This was taken by many and reported on the newswires as a big turn around from the recent comments about growth in the 6’s being tolerable but I prefer to focus on something else he said which to me speaks of continuing adjustment and no stimulus. Mr Li said:

As long as the economic growth rate, employment and other indicators don’t slip below our lower limit and inflation doesn’t exceed our upper limit we’ll focus on restructuring and pushing reforms

So European stocks were higher initially but finished down in London, Paris, and Frankfurt on the back of the US turn lower after both the Dow and S&P hit new intraday highs early doors. At the close the Dow was at a new record close of 15568 up 0.14% but the S&P and Nasdaq fell 0.21% and 0.59% respectively.

On commodities markets, gold’s break out continues and it sits at $1344 this morning, copper caught a lift on both a weak US dollar and the Chinese growth comments, corn and soybeans got spanked down more than 3% each and Silver fell 1.23%.

Data

Front and centre with the release of Kiwi trade balance, Japanese trade data (super important) and the Australian Q2 CPI (super super important for the AUD) before we get stuck into the next round of preliminary Markit and HSBC PMI’s for China, France, Germany, EU, Italy, UK and US – big data flow – and then new home sales and the Crude draw.

 Twitter: Greg McKenna

Comments

  1. Good morning Greg and once again thank you.
    We differ on the inflation argument and just for the sake of it I’ll reiterate.

    Short term we have a falling dollar which as you rightly point out ought means inflation. I believe you are incorrect about where you see Aus businesses are at in terms of the cycle. We have had years, decades even, of, margin squeeze. Most retailers have been complaining (or squealing depending on your point of view). Maybe we are at the consolidation phase which follows the margin squeeze. We’ve seen it in household electrical, sporting goods, and various others. For my own business we are right out of margin. Our new price list goes out next month with about a 10% rise. Price rises FOB USD from China are still coming to add to the A$ effect on prices.
    Maybe Steve needs to get an SME and run it in his retirement 🙂 He might learn a thing or two more about economics! (Not knocking him. I’m an admirer of sorts)

    Anyway just some thoughts that might derail the path ahead. We’ll only know after the event.

    • Deus Forex Machina

      Hi – thanks for this your experiences are invaluable.

      I hope for the sake of business that some of the cuts and income increases over the past couple of years allow for the price rises that are in the pipe to work.

      What I fear though is that given the marginal player sets the price and given that aggregate demand is still likely to be low that discounting eventuates.

      Lets hope not

      • A mate of mine is a builder. He said to me many years ago ‘The hardest thing is to stay in business while competing with those who are going broke’

        As per your thoughts I reckon it is a statement that will always hold

      • True that, I had the pleasure of using National Buildplan group on a project, they blew everyone out of the water by 200k on a circa $2m project (and not because of scope omissions). Now luckily we were well finished by the time of them going into administration but it just demonstrates how difficult it is for the competition when you work in a public sector organisation which uses policies by accountants who do not know the realities of projects. The default thinking is we saved alot of money rather than, something is wrong and as it turned out as usual something was.

  2. 🙂 I think Krugman is a total idiot so I probably shouldn’t comment. He has the Nobel prize!
    They’re all looking in the wrong place for where inflation may come from. Further Krugman’s definition of long term is something like 3 years.

    Most of the money printing by the western world, in recent decades, has ended up in CAD’s rather than inflation. Effectively (given a slight stretch)the more money you printed the more you imported and the lower was your inflation. This then fed back into non-tradables as their was no inflationary pressure on wages.

    Just as we have imported cheaper prices for 50 years from Asia we are nearing the end of that cycle and we are about to import dearer prices. Krugman needs to read Shaun Rein’s book.
    Of course our next problem, depending on your yardstick, is a way over-valued A$ which MAY fall substantially. We’ll see!

    My qualification in saying this is that I don’t know the extent of the effect robotics will have.

    Anyway sure as hell it’s interesting times. Personally I’m feeling between a rock and the hard place so I am really appreciating your posts.

    • migtronixMEMBER

      That’s only because Krugman is an idiot (paid disinfo agent, besides Obama has a NP too!)

      As for robotix the changes will be massive, most people don’t even realise that robots are trading FX/Equities/bonds every day!

      Btw look at the VIX go!