Trader's View - A slow start to the week

A slow start to the week

As expected, the start of the trading week has been a little slow. US and UK markets were off for a long weekend, so liquidity was thinner, and news flow lighter. Geopolitics captured the headlines, though the overall impact to market sentiment from it was marginal. US President Trump’s junket-in-Japan looks to have gone pleasantly, but without too much market moving news. Speculation continues about the future leadership of the UK Conservative Party, with that uncertainty rattling nerves slightly. And Europe’s Parliamentary elections have been done-and-won, and although certainly not an endorsement for the status-quo, the more destabilizing populist-parties have failed to gain critical-mass.

The reaction to geopolitical developments

These were the major macro-events, and in light of them, price action has generally ambled for most of the day. The USD is arguably the conspicuous mover. It’s higher across the board to start the week, following its dip at the end of last week. Arguably, the move came due to a statement made by US President Trump whilst in Japan that he is no rush to broker a trade-deal with China – nor one with Japan – any time soon. That series of events could be mere coincidence however, given the thin holiday-trading conditions probably drove flows into liquid assets denominated in US Dollars, anyway.

Currency markets mixed

Nevertheless, the G10 currency complex was broadly shifted by the slight strengthening in the USD. Other factors were present and driving action in the currency space, it must be commented. The leadership speculation in the UK has hobbled the Pound, as the likelihood of a Boris Johnson victory in that race (combined with yesterday’s strong showing for Nigel Farage’s “Brexit Party” in European elections) raise the prospect of a no deal Brexit. Otherwise, the narrative in the currency market was mixed, with the Japanese Yen dipping, however the Euro rising courtesy of the elections results, and growth currencies trading down very slightly.

AUD higher, but vulnerable still

Which brings the Australian Dollar in focus. It’s holding above the 0.6900 handle, despite yesterday’s play back into the greenback. The move has also come amidst increasingly loud calls for the RBA to cut interest rates next week. The chances of a rate cut from the RBA next week are at 80%, with another cut priced in fully for October. Longer term interest rates in Australia did lift overnight, it must be said, as fears about a global growth slowdown eased very slightly (and probably temporarily). Regardless, the fundamentals looks soft for the AUD, which are being masked by the USD’s pullback last week.

AUD trading as CNY proxy

In fact, much of the shift higher for the Australian Dollar yesterday came as a small proxy move in the Chinese Yuan, after Chinese regulators suggested that traders shorting that currency “will inevitably suffer from a huge loss”. Those comments inspired the belief that China’s policymakers are willing to defend the Yuan, which has depreciated markedly since the re-escalation of the US China trade-war. The line in the sand for the currency is considered around the 7.00 mark. A sustained grind to that level would be just as negative for the Australian Dollar as it is the Yuan – and probably financial markets at large.

Iron ore keeps on rallying: The news isn’t all bad for Australian financial markets. There are some redemptive themes that could support the AUD, and the ASX too, in the shorter-term. The big one is the price of iron ore, which just keeps rallying, courtesy of major global supply disruptions, and very hot Chinese steal production. The moves are good for the miners, good for the economy, and one supportive factor for the AUD. How long this dynamic can last is questionable, because it is being driven by supply-side issues. In any case, it will keep the sun-on-the-back of Australian markets, in the face of growing economic headwinds.

ASX to open slightly higher

As it applies to today’s trade, the ASX 200 ought to start the day roughly with a 4-point gain. The overnight lead has come from European markets, given the US public holiday, and it was a respectable one – European stocks generally gained overnight. It comes on the back of a very lacklustre for the ASX, which closed only very marginally lower, on volumes 30% below average. Market breadth was also middling, with a roughly 50-50 split between rising and falling stocks. Markets await now a fresh lead to trade-off, which may have to wait until US trade tonight, given the light economic calendar today.