Macro Morning: No safe harbour here

See the latest Australian dollar analysis here:

Macro Afternoon


Over the past month there has been a strong divergence in economic release between the G10 (strong), the BRIC’s (weak) and emerging markets (weak but not as weak as the BRIC’s). This data flow has ignited a capital flow away from emerging markets and back toward developed markets as we saw with the strong rally in sterling last week and the recent persistence of strength and positioning change with euro traders going long the single currency.

Yesterday the Indian Rupee, Brazilian Real and Indonesian Rupiah all came under intense pressure from selling which also impacted on stocks and sentiment generally in emerging markets.

And of course it would be unusual for the Aussie dollar to be immune from these flows. Having benefited from the US dollar’s stumble last week the Aussie has overnight had a stumble of its own coming under pressure around 8.30 last night in what looked suspiciously like a big EURAUD flow as you can see in the chart below.


There is correlation and there is causality and the one without the other means you are just matching ideas in a baseless fashion.

But I think there could be something solid in this insofar as crosses such as the EURAUD, GBPAUD, AUDNZD or indeed another other cross of this sort in any pair can be a great trading tool in times of transition and uncertainty. The reason for this is that by doing a euro versus Aussie cross or a Aussie versus Kiwi cross you take out the big uncertainty of the ebb and flow of the US dollar and allow yourself as a trader or investor to focus on the relative merits of the two investment destinations, monetary policy, fiscal policy, data flow, current account and so on. And you can do all this without get whipped by the US dollar vagaries in this period of transition and uncertainty as we discussed yesterday.

Many traders are scared away from the crosses because of the spreads that they sometimes trade in but if you do the math of the relative spreads of both sides of the cross you can often see why they might be a bit wider. But equally because these can be a real way to express a fundamental view while some of the big ones (EURJPY, EURGBP and so on) can be traded short term many others should be dealt with for longer holding periods.

Anyway the Aussie may be losing its safe harbour status per se but at times of USD uncertainty cross plays often offer themselves as a safe harbour in themselves.

On other markets the big news is the sell off in rates is the key thing occurring and the ructions in many ways are emanating from here as much as the data flow.

Overnight US 10 year rates were up a further 5 points to 2.88% and developed market sovereign 10’s were all higher as well as money is clearly being pulled out of the way of the recovery, the Fed and the Taper. Bunds closed at 1.90% while Gilts rose 5 points to 2.75%.

Stocks didn’t cope very well with the emerging market sell off not the rise in rates with US markets closing on their lows for the day. The Dow was 0.47% lower, the Nasdaq fell 0.38% and the S&P was down another 0.59% to 1646 for a loss of 10 points. Europe also saw a sea of red with the southern markets of Italy (-2.465) and Spain (-1.86%) leading the charge lower. The CAC fell 0.97%, the DAX 0.31% and the FTSE was 0.52% lower. The sky just might be falling and probably only weak data now can stop this run in bonds higher and stocks lower.


Huge day for the Aussie today because if, or if not, the RBA minutes are dovish the Aussie is going to move and likely aggressively. The RBA Minutes from this from this month’s meeting are out at 11.30 and over the next 24 hours we also see the release of Kiwi inflation expectations, Japanese All industry index, German PPI and Chicago Fed Index.