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It’s not often you see cable trade in 300-point range, but clearly the market was positioned for something much more aggressive. In fact, the guidance came with so many caveats and knock-outs that many feel the BoE is actually looking at productivity more than anything; by keeping rates low, hopefully the trend in better data will continue and justify putting up rates by at least 2016. It will be interesting to see how UK/European traders come in today after further reflection; a move above 1.5501 should see 1.5537 (the 200 day moving average) come into play, where are a good level of offers are also being reported.
Asian traders have not really reacted to the BoE guidance, with GBP/USD trading in a range of 1.5501 to 1.5485, while the bigger moves have been seen in USD/JPY and AUD/USD. Price action in USD/JPY favours further downside and the bears will be eyeing a much more pronounced move to 93.75 to 93.34 (June 13 low and 200 day MA), although we feel this is very aggrevisve at this stage.
Data out of Japan was quite encouraging today, with another solid week of MOF fund flow data showing Japanese funds bought ¥696.9 billion of foreign bonds, up from ¥233.2 billion last week. The June Balance of Payment current account balance also came out lower than forecast as well, which modestly subtracts from the JPY as a safe-haven currency. The Nikkei is currently up 1.1%, although has found more inspiration from the China trade data than the BoJ meeting, which came out in midday trade.
As expected, the BoJ held off from announcing anything new, although one official (Takahide Kiuchi) called for the 2% target to be pushed out to the ‘mid-term’. The bank sees inflation expectations increasing, which isn’t anything new as we have seen rhetoric like this before; while positive inflation expectations are a clear policy tool for the BoJ to engineer negative bond yields (bond yields adjusted for inflation expectations), this isn’t enough right now to push USD/JPY back to 100.00 anytime soon.
The strength in the AUD has been there for everyone to see and even a poor Australian July employment report wasn’t enough to keep the Aussie down, after hitting a low of 0.8971. On one hand the employment rate remained unchanged at 5.7%, however this was caused by terrible participation rate, which at 65.1 was the lowest participation rate since 2006 and there have been calls that if the participation rate had stayed at 65.3% then the actual unemployment rate would be at 6%!
The fact is, this employment report will not affect the RBA’s immediate thinking, despite the economy losing a reasonable number of full- and part-time jobs. With an 18% chance of a September cut being priced into the markets, we should see these expectations being priced out as there clearly won’t be a September rate cut. November still seems the most likely date for a further cut, given we would have had another two jobs reports, the Q2 GDP report and most importantly the October 23 Q3 CPI print, in which expectations for the median headline print is 1.9% (range 2.6% to 1.5%).
China came to the party pretty much at the same time as the BoJ meeting and blew the market away with a solid import and export report. Naturally when you see a 5.1% rebound in exports in July and 10.9% increase in imports you are going to see good support for the AUD; however there were also good moves higher in the China CSI and CME copper, which is up 2.3% on the day. Perhaps the bigger gains can be seen in Australian materials names, with good buying seen in across the board. It’s also positive to see the iron ore price now at $133.1 per tonne, up 20.5% from the May lows and now effectively in a bull market.
The fact that today’s Chinese trade figures showed another record level of import demand is highly positive for risk as well, with 73.15 million tonnes being imported - a solid rise from the 62.3 million tonnes seen in June. While on the subject of iron ore, all eyes now fall on Rio Tinto who reports just after the close. The market is keen to see a beat of the $4.16 billion net income and $26.1 billion in revenue, although from a more macro-focused perceptive, Sam Walsh’s views on China will be keenly followed.
European markets look set to see a reasonable start, with a positive open expected across the board. Most of the flows we’ve seen today have been biased towards long ASX 200 positions, while client business with regards to our European markets has been much more mixed. In upcoming trade we get data in the form of Greek unemployment rate, German trade balance and current account and Spanish industrial production. It will also be interesting to keep an eye on the level of demand at the today’s $16 billion 30-year US treasury auction.
Yesterday’s ten-year auction had the lowest bid-to-cover since April 2009 and today’s longer-dated auction will really highlight whether traders are shying away from treasuries, especially as the underlying yield at present is at the same levels as the previous auction. A bid-to-cover below 2.26x could see bond yields higher, potentially putting a bid back in the USD. On the earnings side we get results from Aviva, Standard Life, Schroder’s, Commerzbank, Rio Tinto (as mentioned) and Deutsche Telecom.