Originally published by AxiTrader
A LITTLE ON THE ECONOMY
CPI this week is going to be the big number for the local market.
Of course, as I’ve written in the past week it looks like the economy might be in better fettle than many of us feared. The CESI score has climbed from -30.7 12 weeks ago, +0.8 4 week’s ago, to 34.2 now after that big beat on the employment data last week. That is important because it suggests the economy may be in better shape to withstand the slow motion train wreck that might happen in house prices. As an aside though, why is everyone running around with their undies on their head when prices are simply having a reaction to three years of rollicking gains. At it’s worst the market is likely to only give back one year of gains. Anyway, the wealth effect probably has a phase transition at some point if the falls accelerate sharply or start to exceed 10% - if for no other reason than the headlines will scare the heck out of folks.
Anyway, back to CPI this week.
It’s an important number because if inflation in Australia was a little higher the RBA would likely be pushing rates up – or have already done so – given GDP growth we’ve seen and which they are forecasting. But inflation has been down and through the bottom of the range for an extended period. That’s not likely to change with this print according to the Reuters poll. While headline CPI is expected to print 0.5% for a 2.2% year on year rate both the weighted median and trimmed mean are expected to print 1.9% year on year. But data matters folks so if we see a miss either side of expectations we’ll see the Aussie, and interest rate expectations, react.
THE AUSTRALIAN DOLLAR
Speaking of the Aussie, it’s higher at 0.7415 but trapped a little between the competing forces of US dollar weakness against the euro and other majors and the weakness of the Chinese yuan itself. That’s seen it outperform the yuan’s move but underperform the euro’s resurgence against the US dollar.
The yuan’s moves are still going to be very important for the Aussie, but if this US dollar reversal has the kegs it might – up toward euro 1.1850 and if that breaks 1.1960 to 1.2060 – then the Aussie is going to go along for a substantial part of that ride.
How far, and how high the AUD./USD will go is difficult to know.
But it is worth noting that not only has the Aussie data surprise index risen sharply recently but also that the long tails on the weekly AUD/USD charts for some weeks now as it has held above 73 cents and the positioning data which shows a net big spec posi of -40 thousand odd contracts sets up the chance of a bold reversal.
As usual it’s as much about the US dollar as it is anything else. But equally usual is the feedback loop – positive this time – that a weaker US dollar can give the Aussie if commodities start to rally as well. And with global metals and mining shares materially underperforming the global stock index recently perhaps there is room for a reversal of fortune. Any AUD/USD rally is however likely to remain counter-trend.
To the charts on the day then, and 0.7440/50 is resistance before 0.7490 and 0.7510/15 where the downtrend line from the January high comes into play. Above that, it’s 0.7625. Support is 0.7408 and 0.7390.
ASX INDEXES
The SPI is still in its uptrend. That much is clear.
So there is no point fighting this rally. Equally though, unless or until I see a close above the recent highs for both the SPI and the physical ASX I continue to see this as a topping pattern. We’ll see I guess. As it stands this morning my sense is we retest lower if 6,194 gives way in SPI terms. The similar level for the ASX is 6,269/72. Here’s the SPI.
DATA:
We’ll all still be eyeing China, it’ markets, and the Yuan fix and subsequent moves. But other than that it’s quiet with the Chicago Fed National Activity index and existing home sales in the US the highlights.
Have a great day's trading.