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Trader thoughts - the long and short of it

In the FX space, the focus has really been two fold. Firstly on USD/CAD, which has pushed into C$1.2800 and the highest levels since 13 July.

Market data
Source: Bloomberg

However, AUD/USD and the AUD crosses have also had a good working over, with AUD/USD seeing a clear reduction in the elevated level of net longs held by speculative funds.

The low in the session has been $0.7690 and the bears are seemingly driving the show here. From a technical standpoint, ideally one would like to see a slight rally back into the 6 October low of $0.7733 and a subsequent rejection to confirm this former low is now solid resistance.

However, there has been quite a bit of damage done on the daily chart and predominantly the clear driver remains a tightening of yield differentials between Aussie and US Treasuries.

The fact that Aussie Q3 inflation was so benign yesterday, it resulted in the front-end of the Aussie yield underperforming relative to longer-term rates, causing a bull steeping of the Treasury curve, with the implied probability of a hike from the Reserve Bank falling to 37% by June.

Clearly the RBA are not raising rates anytime soon and when we compound this with higher US bond yields we start to see a trend developing in AUD/USD, which is very compelling for so many FX traders.

Let’s not forget we have our political risks which in itself is causing AUD headwinds, notably Friday’s High Court ruling on the issue of Barnaby Joyce and six other MP’s holding dual citizen status. Should the court vote against their case, we should see by-elections, in-turn increasing the prospect that the Liberals will hold a minority Government.

US bond yields have ticked up again overnight and we can the US 10-year now sitting at 2.43% and eating through technical resistance. A 2.2% rise in September US durable goods has helped, with the 0.7% rise in non-defense capital goods shipments supporting this Fridays Q3 GDP print.

I have felt the consensus call for 2.5% has been too bearish. We have also seen various headlines around the Fed chair job, with some focus on Trump’s interview on Fox Business, where he suggested (about Janet Yellen), “in one way, I’d have to say, you’d like to make your own mark,” going on to say, “which is maybe one of the things she’s got a little bit against her.” He did counter this by detailing, “but I think she’s terrific, we had a great talk,” and “we’re obviously doing very well together if you look at the markets.”  So the macro-focused market participants remains on tenterhooks about this appointment. Jerome Powell or John Taylor?

The USD has really moved to any great degree and we must consider the further selling of US fixed income. This is influenced by the fact that USD/JPY hasn’t held ¥114.00 has been noted.

EUR/USD has been interesting too, given the event risk in the session ahead. On one hand, you have many doing what all good traders should be doing and managing the risks and exposures around tonight’s ECB meeting, as well the noise that will come out of Washington and tonight’s vote on the Senate’s Budget Resolution plan.

The other, are those actually trading around the event specifically and taking a view on what Mario Draghi et al will do (announced at 9:45pm AEDT), or won’t do. If we look at price action in EUR/USD we can see the pair has caught a bid and reclaimed the 1.18 handle, so there is no clear angst seen in Euro assets. Consider the market has a pedigree of going into ECB meetings expecting a hawkish tilt from the central bank, but often Draghi hits them with dovish announcements.

The street feels the ECB cut the monthly purchase rate from E60 billion down to E30 billion, while extending the program by nine months. This obviously equates to an additional E270 billion in asset purchases, so liquidity will still highly abundant going forward and one suspects, depending on the accompanying language and forward guidance, that the EUR should see little in the way of moves, with the currency naturally taking its direction from how German bunds react. Given the history of the ECB though, it would not be out of the question if we only saw the program tapered by E20 billion, or not at all, which, in the case of the latter scenario would send EUR through the floor if it weren’t backed by language that E60 billion in monthly purchases was only for a further six months.

So the duration of the program is perhaps just as important as the actual monthly run-rate, but ultimately we should think about the total future purchases too. It is a key event risk, and one could argue a pivotal moment in the global monetary policy experiment, which has been put in place to “do whatever it takes”.

In the equity space, we have seen the S&P 500 lower by 0.5%, with financials, tech, discretionary, energy, and materials lower and generally in-line with the S&P 500. Industrials have fared the worst, with a loss of 1%. Either way, the leads are inspiring. Our call for the ASX 200 open remains above 5900, and we have seen no net change from where Aussie SPI futures were trading at 4:19pm AEDT, and the official close of the ASX 200. There seems little to inspire in the energy and materials space, with US crude lower by 0.5%, while iron ore futures are down a touch as well.

All eyes though fall on ANZ, who report full-year earnings shortly. Cash earnings are expected to come in around $7 billion, with a net interest margins rounding out the year at 2.01%, which is a six basis point fall on the year, although it would represent modest expansion from 1H17. The market expects signs of credit growth and operating improvements. Look for a total dividend of $1.60 (80c declared in 2h17), which could take the payout ratio below 70%, while return on equity is expected to push over 12%. Investors will also be looking closely at further improvement in asset quality, while focusing on its capital position given there is a feeling that we could be staring at a decent sized buy-back in early next year. It’s hard to see huge upside catalysts, but the market is enthused by this name right now and the trend in the share price shows a steady creep higher.

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