Data drops stirred in currency markets

Following yesterday’s data drops, risk currencies slipped, and slipped hard.

In the case of the AUD, the USD saw more strength on better than expected new home sales – raising the ‘taper talk’ from the media once more.

We think the most interesting outcome yesterday was not the China data but the inflation data. It was low, but close enough to estimates to make no difference, and that has left economists and analysts alike continuing to champion their own views rather than the views from the data itself.

The last line of the statement again provided clues as to how the board might react to the inflation data from yesterday: ‘The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand’.

‘As currently assess’ and ‘may provide’ tend to make us lean back on the idea that the August meeting may make it 20 times in the last 24 years that the RBA has left rates on hold. There is no real data that is forcing the RBA to move inside the next 12 days.

The swaps market tends to agree on pure Australian data. Having started yesterday at a 65% chance of a rate cut, it fell to below 50% straight after the CPI data, before falling back to 60% on the terrible data drop out of China with the HSBC flash PMI data.

The board has also alluded to the fact that China is currently going through structural changes, however believe it is well equipped to handle them. This again suggests that the RBA is only going to cut if absolutely necessary and is looking at data almost purely on a national point of view.

In short, the main point to come out of yesterday’s data drop is that the August rate cut debate will continue to rage on all the way till 2.30am AEST on August 6.

What is also starting to become apparent is that the possibility of a ‘rest day(s)’ is growing. Since the June 25 low of 4632, the ASX has not looked back; rising 404 points in exactly a month (+8.72%).  The rapid rise in the market will start to see profit taking, and a possible pull back before the start of the August reporting season.

It has already started in the US markets; the S&P has just seen its second day in the red, while the Dow also fell after some disappointing results from Caterpillar. We wrote on Monday about Caterpillar’s woes. The world’s largest shorter Jim Chanos has been climbing all over the stock on forecasts of poor sales due to the slowdown in China. His predictions were almost spot on, with CAT’s EPS line in at $1.45 versus $1.70 estimates, seeing CAT losing 2.4% during the trading day – this will impact SVW and the rest of the mining services. It will be watched very carefully today as this indirect lead filters into how the service sector is performing - downside risk is mounting.

Moving to the open, we are calling the ASX 200 dead flat once more, the market looks like opening up four points to 5040, however with the S&P and the Dow contracting this call looks shaky and coupled with the fact the Nikkei is matching, down on the open red screens looks likely.

The current uptrend has mainly been caused by the uptrend in cyclical stocks as gold, energy and iron ore plays have shifted higher. However BHP looks set to finally pull back with its deposit receipts, suggesting the stock should contract by 20 cents today to $34.53 (-0.58%); this call is in the face of iron ore hitting fresh high for winter at $132.10.

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