Politics dominates markets

It’s supposed to be all about the Federal Reserve this week and for global markets, it is. However, politics are presently dominating the news flow.

Australia
Source: Bloomberg

There has been heightened speculation that Jeremy Corbyn’s rise to Labour party leader could bring a referendum on the UK becoming part of the EU forward to late 2016. This theory hasn’t gained a huge amount of traction, with EUR/GBP trading in a 35 point range.

However, Australian politics has had everyone on their seats and there is no doubt the buzz it’s created was echoed in the currency markets. Malcolm Turnbull has promised leadership will no longer be governed by a captain’s call and it will be a ‘thoroughly liberal government’. Of course, his immediate port of call is to select a strong government that he can lead into elections in 12 months time.

Naturally, many of the positions are being widely speculated on and we should hear more on his front bench by the end of the weekend. Just looking at price action between 4.12pm and 1.00am AEST, we can see the market has suggested that the potential for a business friendly and strong government that has the potential to lift consumer and business confidence is being crafted. Many will be keen to look at upcoming consumer confidence reports (from both ANZ Roy-Morgan and Westpac) to see whether having Malcolm Turnbull at the helm and, perhaps more prominently, Joe Hockey stepping down as Treasurer has a flow-through effect into the real economy. Perhaps from this perspective, traders will be very keen to see who is put in as treasurer. From all accounts, the current favourite Scott Morrison, should be taken fairly well from the market.

AUD/USD lifted from $0.7063 to a session high of $0.7173 as the drama unfolded, but the bigger percentage gains have been seen against the GBP (1.6%) and EUR (1.7%); although we have seen some selling of AUD in the last few hours. On the equity front, SPI futures are suggestive that the ASX 200 should get off on a weaker footing – our call is for the ASX 200 to unwind at 5080, a fall of 0.3%.

Given the positive flows into the AUD, we may see support for Australian domestic cyclicals and the banks. BHP could open 0.7% higher based on its American Depositary Receipt, although both the material and energy sectors were the worst performers on the S&P 500.

It promises to be an interesting session with the political changes clearly being the key driver of portfolio flows. It will also be interesting to hear how foreign investors perceive the political news –while much ink has been spilt about Malcolm Turnball being the fourth Prime Minister in 28 months, I would not be surprised to hear increased confidence from the international community as well.

Away from politics, today’s Reserve Bank meeting minutes should provide limited clues to future policy moves and in turn should cause little reaction. Keep an eye on AUD/USD as the pair is fast approaching the May downtrend at $0.7180. A break here could see a move into the $0.7260 area. Watch for a break of the May uptrend in GBP/AUD as well at AUD$2.1630, and I would also look for a move into the August lows of AUD$2.0874 on a trend break.

At some stage this afternoon (no set time) we’ll get narrative from the Bank of Japan (BoJ) meeting. Interestingly here, there are two investment houses expecting a ¥10 trillion increase to its asset purchase program. Given the recent rhetoric, if this was to materialise from BoJ, one would be extremely surprised indeed.

If we are going to get further easing it would come in the 10 October BoJ meet, and it seems logical that they would want to see the wash up from this week’s Federal Reserve meeting and hold the ability to be reactionary. If we see anything from Mr Kuroda and the BoJ today, it will be setting the scene for additional measures if they so need.

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