Trader thoughts - the long and short of it

Morgan Stanley elegantly put it that the RBA is 'bullish, but not hawkish' and that seems a fitting statement not just for the Reserve Bank, but also the likes of the Federal Reserve and now the European Central Bank (ECB).

Market data
Source: Bloomberg

To suggest these central banks were hawkish would imply a concern about inflationary trends. While these institutions still believe in their models and therefore optimistic about the inflation outlook, they would absolutely prefer these same accommodative financial conditions, with inflation looking like it at least wanted to go near target.

So ‘bullish’ seems fair and there seems little reason to rock the boat, with Europe’s economics on the mend, the political system, while still casting a beady eye on future Italian elections, is moving from one risk to another with seemingly positive resolution and we are actually staring at a more united Europe than at any stage in years. We may even see the Greece issue sovereign debt again in the near-term and pension, and hedge funds may actually even buy it!

We can also see borrowing is picking up and talk of investment too. The question though is around a stronger EUR and the impact inflation, as well as general flows into European assets. Keep in mind little concern from the Governing Council on the recent EUR move was portrayed from the ECB and again this is EUR buy signal in itself. So, we’ve seen a strong move in EUR/USD and EUR crosses overnight and the volumes going through were huge too, although we haven’t seen the same sort of volatility in European fixed income.

EUR/USD traded in a range of $1.1478 to $1.1659, with the upside move assisted from news that US special council Mueller was now investigating Donald Trump’s business transactions. Of course, the market is keen to see if Trump will look to sack Special Counsellor Mueller, although the White House has said they have no intention ‘at this time’.

One US bank has even coined the term that selling USDs has become a religion and this is a view that no central bank, except the Fed, would welcome and certainly not the ECB or RBA. The latter holding a strong belief that Fed hikes would have been a strong headwind for the AUD/USD and assist with the economic rebalancing. If only FX markets were that simple.

And simple they aren’t, especially for those traders caught up in the move last night, with the EUR trading lower with the ECB maintaining the line in the statement that ‘it stands ready to increase the size of the programme in terms of size or duration’. This has clearly surprised the market who expected it to be removed. A strong about turn was then put in place with Draghi talking up the view that the ECB would be able to discuss the future of bond purchases at the 7 September meeting. It is a firm consensus view that Draghi will detail a plan to lower the monthly asset purchase run rate closer to €40 billion, however, let’s not forget that Draghi speaks at the Jackson Hole symposium in late August and his speech is shaping up to be the highlight there.

European equity markets have seen little in the way of change, and neither have US markets with markets holding on well in the absence in any major catalysts. Some focus on the NASDAQ, which has closed up, albeit only 0.08%, but technically the market is up for a tenth straight day - a run it last mirrored in early 2015.

Perhaps some have taken another look at Bitcoin (tongue in Cheek), as the price has rallied 17% and eyeing a move above $2700. It all suggests a somewhat soggy close to the week in Asia, with Japan and Australia, called modestly lower, with the ASX 200 likely to open at 5743. US crude is 0.7% lower at $46.73, with Brent closing at $49.29 despite pushing above $50 for a brief time. So energy stocks could be interesting given the strong bid we saw in this space yesterday. Iron ore gave back some of the recent gains with a 3.1% drop and Dalian futures have also attracted strong sellers in the night session.

Banks will be key with a lot of the heavy lifting having already taken place, with signs of clarity in the space around required capital levels. This means we have already seen a shift from institutional funds to a more market neutral or even overweight positions, specifically on ANZ which seems to have emerged as the pick of the bunch if you look at the changes in ratings from sell-side brokers.

Perhaps the highlight of the day though will be RBA deputy governor’s speech in Adelaide at 12:40pm AEST. The speech will centre on how global influences impact the domestic economy, but there seems little doubt that Mr. Debelle will be probed on the RBA minute’s neutral rate calls in the Q&A session. He will be prepared for this and he will likely speak on behalf of the collective.

If the market has over interpreted the notion that mortgage holders need to seriously consider higher rates in the future, then naturally this could be the forum for the AUD/USD to trade north of 80c or into and below 79c. European and US-based traders clearly haven’t been too concerned about the idea Mr. Debelle could hit the AUD/USD and continue to hold longs in this pair and again that’s also down to USD weakness because we can see AUD/NZD and AUD/CAD lower.  

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