Battle lines drawn

No one is prepared to take on too much risk ahead of the Bank of Japan and Federal Open Market Committee (FOMC) meets.

  • The S&P 500 has closed unchanged (range of 2135 to 2153), and utilities, real estate investment trusts (REITs) and financials performed well.
  • We’ve seen limited moves in fixed income, with the US ten-year treasury pushing up one basis point to 1.70%. The US dollar down 0.2% on the session.
  • AUD was the mover on the session, trading in a range of $0.7573 to $0.7474. Good selling has been into the 12 September high of $0.7561, and a daily close above this former high would turn me more bullish. I continue to trade a $0.7560 to $0.7450 range, but happy to take direction on a break either side of this range.
  • AUD/NZD has been getting some good attention from FX traders, with price action becoming more bullish and reacting to the fact that on a number of fundamental inputs the pair is ‘cheap’. The break of the August downtrend yesterday sets the pair up for a move into the NZ$1.0430 area.
  • Spot rebar and iron ore both continue to head lower, with spot iron ore in AUD terms now at the lowest since mid-June, having fallen 10.4% since early August. One for the radar, but AUD/USD is showing absolutely no correlation with this key terms of trade.
  • US oil prices are a touch lower from yesterday’s Asian trade. Again, watch price around $43.00. A closing break through strong bids should see a quick move into $40.00 and I expect traders to jump on this as a trade.
  • Staying in the FX market, USD/JPY remains the ‘must watch’ currency pair given the event risk this week. It’s no surprise that no one in the market is prepared to push prices around, but that will change on a closing break below ¥100 (the June uptrend) or ¥103 (the January downtrend). Stay neutral for now, but be prepared to react when the market dictates. One suspects moves in USD/JPY will have more far reaching implications for many other markets, including the RMB.
  • Some focus on China with good gains yesterday in the Hong Kong and mainland markets. We heard the Ministry of Finance has selected RMB1 trillion of further projects funded through their public-private partnership to add to the substantial fiscal stimulus already announced. It’s interesting to see the China A-shares premium over the H-shares (Chinese companies traded in Hong Kong) is now at the lowest premium since 2014 as investors see greater ‘value’ in Hong Kong.
  • The Bank of International Settlements (BIS) report from the weekend is well worth investigating, with warnings that the credit-to-GDP ‘gap’ has exceeded all other nations. Some of the headline writers have talked about a future banking crisis, with China generating less and less growth per unit of credit. Another concern to put on the radar, although it is well known that China’s credit binge has reached extreme levels. What’s the catalyst to turn this into a negative scenario?
  • Turning to the Aussie market and SPI futures are flat. We are calling the cash market slightly lower at 5284 - if the exchange opens today. We are waiting for a statement, but by all accounts it will be open and one can also hope it opens in the correct order.

If the ASX 200 does open today, one suspects that there will be an air of relief and many will be pleased that the technical glitch happened on a day where corporate news flow was limited and the leads from Wall Street were as flat as you will ever see. That subdued volatility, however, may change this week with the Bank of Japan (BoJ) and FOMC meetings dictating that the exchange simply needs to be open.

The key this week for me is how the Japanese and US fixed income market react to ether central bank decisions. If ‘real’ bond yields (ie. inflation adjusted) start moving up, it will cause a tightening of financial conditions that will not be taken well by the credit or equity markets. One suspects that if US ‘real’ yields do increase it will be accompanied by a stronger USD, which will exasperate the issue, so this will be an important consideration for the Federal Reserve. In both meetings, the playbooks are diverse, although for those brave enough to trade over the announcements and not reduce risk I suspect the FOMC meeting will be the easier of the two to trade. There is still no clear view on how the JPY will actually behave if the BoJ cut the deposit rate into deeper negative territory. It can often be far easier to react than prophesise!

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