Originally published by AxiTrader
THE AUSTRALIAN DOLLAR
The Aussie has shaken off the disappointing CPI news yesterday which suggests no discretionary pricing power and with it a weakness in aggregate demand. AUD/USD fell to 0.7393 but lifted as the yuan recovered in afternoon trade and then caught a bid with the euro.
The recovery from early weakness in the Chinese yuan and then the weakness in the US dollar this morning have seen the Aussie regain that lost ground and climb to 0.7453. That the Aussie’s recovery has been in lock-step with the euro’s move since the low yesterday after the recovery in the yuan also ignited a little bit of US dollar weakness across the board.
Given the risk on attitude of markets in the wake of the EU/US trade announcement this morning the chances are that the Aussie has further legs. But the question is really more about the US dollar, most likely via this euro linkage. And that means the ECB meeting tonight and then US GDP tomorrow night are huge events in what’s a very light calendar of Australian data (import prices and PPI are subverted by the CPI yesterday).
So I’ll be watching the wedge in the EUR/USD as much as I’ll be watching levels in the Aussie. For the moment you’d have to argue the bid is strong and a test toward 0.7480/0.7500 is on the cards. If the Aussie can break that then the next level of resistance is 0.7530 and if that breaks it’s onwards and upwards to 0.7660.
ASX INDEXES
After the rally in the US the Australian market might have a perkier day after yesterday’s mood soured with the miners the only big winners. SPI traders have added 8 points at the moment – questions of valuation will be top of mind again today though.
I say that because a bearish report on Australian banks from a big investment bank and a CPI which suggest rates on hold, maybe even down, over the next year was not what the banks needed yesterday. Indeed save for the rally in basic materials it was a fairly glum day for the ASX. The early rally faded to a close of 6,247 which means the last two days have both been inside Monday’s big fall.
That’s indecisive.
And it left the SPI resting right on the uptrend line yesterday afternoon when I left the office. It’s still had an overall down day but it has backed off a little from the trendline. Traders have added 8 points overnight and it is looking like the SPI – and the ASX – are mapping a sideways range. In SPI terms that’s 6,145 to 6,267. A break either side would send a strong signal. Right now the SPI is essential right in the middle of that range.
A LITTLE ON THE ECONOMY
By now you’ll have read plenty of takes on what the CPI result yesterday means. But just in summary quickly the trimmed and weighted mean measures of inflation were bang on the money at 0.5% and 1.9% yoy. The headline was a small miss at 0.4% which saw the you rate dip back to 2.1% from 2.2%. No big deal really.
But what the data showed, and what concerns many, is that again it is rises in non-discretionary items which are driving inflation while discretionary inflation lags. Scutty has summed it all up very well over at Business Insider if you aren’t across it already this morning. But what I wanted to highlight is that the lack of pricing power in the discretionary items suggests to me a lack of underlying aggregate demand in the economy other wise companies would be able to raise prices. No it’s not all the “Amazonisation” of the economy. This is the side effect of an economy reliant on consumers carrying high debt burdens and seeing ow wages growth.
It means rates won’t be rising here in Australia for an indefinite period. Probably 12 months, perhaps 24. And the deceleration in underlying inflation suggest if the jobs markets starts to cool and unemployment risers the RBA may need to cut rates.
DATA:
On the day the ECB meeting and Mario Draghi’s press conference are the big events for forex traders and markets in general. No real change to the message that things are working back toward ECB targets and the taper is on track is expected. Also out are US goods trade balance, durable goods orders, Kansas City Fed index, jobless claims, and wholesale inventories.
Have a great day's trading.