Today is more a currency story

Today is more a currency story than an equity story, with the AUD firmly in play amid a backdrop of a flat open for the ASX 200.

In some ways it will be a small win for the bulls if the index can hold the 5400 level for the day, and given the traditionally low volumes on Melbourne Cup Day, we may need to see Japan or China really come alive for the ASX 200 to see significant index movement. I see no reason why either these markets are going to see a pickup in volatility given the news flow, and it’s worth bearing in mind that the 30-day correlation with both markets is low right now anyhow.

Leads are fairly flat, with the S&P 500 putting on a modest gain - thanks to some fairly dovish rhetoric from the three Fed members, James Bullard, Jerome Powell and John Williams, with Mr Williams suggesting that the FOMC could actually boost its QE program. John Williams is not a voting member of the Fed, but his comments firmly put him as the most dovish Fed member. Nevertheless, it must be said that there wasn’t too much of a reaction in the bond market anyhow on these comments, with the ten-year treasury yield only falling two basis points on the day to 2.60%.

Melbourne Cup Day traditionally a good day to be holding Australian equities

Melbourne Cup Day has traditionally been a good day to be holding stocks, and traders tend to get into to the spirit of things, sit on their hands and see little reason to dump stocks. With the leads from offshore, it seems logical that this will play out again. Also, as BHP’s ADR is pointing to a modest gain, we will have to see a decline in the banks for the index to really struggle; and again, I see no reason for that to materialise today.

The comments from various Fed members have put a modest bid in the AUD/USD, with the pair hitting a high of 0.9514. I would expect a tight range in the pair going into the RBA statement given the leads from the equity market, while the statement will need to be just hawkish enough to justify the ten basis points of hikes that are priced into the swaps market over the next year. The RBA Governor Stevens spoke last week and tried his best to talk down the currency, but seldom will currency traders act too aggressively, unless they genuinely believe the central bank will act. Right now, Mr Stevens can talk down the local currency as much as he wants, but unless traders really feel that he will cut rates, there will be no sustained follow through the selling. The prospect on rates being kept at current levels for many months to come is real, and the statement should solidify this belief later today.

Will we see the RBA talk down the AUD?

So in theory we should see a firmly neutral statement, given the improvement in domestic factors such as business and consumer confidence, while yesterday’s retail sales numbers were double the market expectations and inflation is no major concern. Then you have offshore influences such as China showing no cause for alarm, and iron ore continuing its slow grind higher, with the price pushing to $135.80 per ton (+0.4%) yesterday. Given Mr Stevens’ recent comments, the view on the currency from the collective will be interesting, because in the October minutes there was very little concern about the AUD strength. Any narrative that suggests AUD/USD is too ‘high’ again, could see modest downside. It has to be said though that technically the support seen of late around 0.9428 (the 38.2% retracement of the August to October rally) could be significant and a break back above 0.9593 could see the pair look to push back to the 97 handle.

So all in all, a flat day expected, while the RBA shouldn’t provide too much fodder for AUD bears. Sea Moon looks a good shot for the cup, although Dear Demi is another horse I feel could do well today.

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