Why would they? The swaps market has once again ramped up its forecast of future action from the Reserve Bank of Australia, with the markets now pricing in an 84% chance of easing over the coming 12 months. Still, a 25 basis point cut would do little to really promote growth and subsequent inflation unless they cut aggressively. I guess this is why Deutsche are looking at the cash rate to fall to 2%.
Australian growth being called into question
The Australian growth numbers today have been poor, not just at a headline level, where quarterly growth at 0.3% was ten basis points below that of even the most bearish forecast. Drill down further and we can see real gross domestic income has seen two negative quarters, as has national income, while GDP on a nominal-basis has contracted. The Australian bond market has portrayed the full story and a look at the short-end of the curve highlights a collapse in the three-year bond. The spread between the Australian ten-year bond yield and that of the US treasury has narrowed to 79 basis points, with spreads so important in driving price action in AUD/USD.
Forex traders have sold the AUD today and while there is still more data to come this week in Australia and US, the pair is eyeing a weekly close below channel support at $0.8420. The AUD is once again the flavour of the month from clients. But flows haven’t been all selling, which is what you’d expect when increased talk of a domestic recession occurs, alongside a central bank that many feel is behind the curve. Domestic cyclicals are showing no stress whatsoever.
China looking red-hot right now
The market to look at is China, which is red hot right now, with the CSI 300 up 3% and making a new high for the year. The A50 cash is up 3% as well and this is a product non-mainland traders can trade that has a 90% 30-correlation with the CSI 300 index. The volumes going through the markets are staggering and if we look at the broader Shanghai Composite, as of 13:30 AEDT, turnover was 222% above the 100-day average and 100% above the 10-day average. This builds on Friday’s turnover, when we saw a record $116 billion turnover on the Shanghai market. Clearly the Hong Kong/China ‘connect’ is helping, as are comparative low valuations and a perception that broad easing measures are likely to be seen.
Japan and Europe are other markets I have suggested that traders should hold a long bias. USD/JPY continues to eye the ¥120.00 level and the stability in the Japanese government bond market after the Moody’s downgrade is helping traders to push the pair higher. Commentary from key Federal Reserve members Bill Dudley and Stanley Fischer suggesting that the central bank should lift the funds rate mid-2015 is also a strong USD positive. If you want to know why EUR/USD, AUD/USD, USD/JPY and GBP/USD are trending so strongly, it’s clear that the performance of the US economy and path of monetary policy seems to be so far diverged from every other major economy at present that you can see why the moves are so one sided.
There also seems to be a growing view that the Fed will alter its stance and that rates will stay low for a ‘considerable time’ at the 17 December meeting. US two year bond yields have moved up to 54 basis points, which is only four shy of the highs in September, prior to a 30% slide in oil prices. Focusing in on US trade, we get ADP private payrolls (consensus is 222,000) and the ISM service data (expected to grow at a slightly faster pace of 57.5). So these data points could be a key catalyst for the session. We also hear from Fed hawk Charles Plosser and it will be interesting to see whether he joins the ranks of officials who are publically welcoming the falls in energy prices. The Beige Book will also be in focus.
Europe looks set for a stronger open, with traders eyeing a close above clear supply at 10,000 in the DAX, while the French CAC is looking to close the week above the year’s downtrend at 4,422. The FTSE, itself is looking for a test of the rising trend drawn from the May 2013 spike high. So while Japan, India and China are breaking out and looking really strong, European markets are also looking to make significant technical breaks. Let’s see how that evolves after tomorrow's European Central Bank (ECB), with the risk of disappointment (given current market expectations) high.