AUD on the rise after shutdown

The response to the first US government shutdown in 17 years has seen rational traders looking to data, while irrational traders have reinvigorated their trading antics.

- US shutdown is taken in stride

- Asian data drives AUD and Asian markets higher

- RBA signals the end of easing

The irrational investors now expect the Fed to hold the line on monetary stimulus and the longer the shutdown drags on the longer it will stay in the market. With the debt ceiling now 16 days away, the market views an October ‘no move’ statement as a given.

The markets are also watching the rating agencies; S&P stated that if the debt ceiling isn’t raised the US would be placed into a selective default which is unlikely to affect its rating in the interim.

This again is filling the markets with renewed confidence even though the US would enter a technical default and payments would be held over for approximately one month once additional tax receipt hit the books. The fact that rating agencies won’t move is a positive for US borrowing. It is however a major embarrassment for the US to default, but will trigger irrational trading to back the Fed over Capitol Hill a positive for equity markets particularly.

The rational investors are watching the data coming out of the US; although there is a prospect that the official non-farm payroll numbers won’t be released this week due to the shutdown, private data collection is showing signs of solid growth. Overnight the ISM manufacturing data rose to its strongest level in two and a half years; hitting 56.2 from 55.7 last month which was well above estimates of 55.

US manufacturing growth

The growth in manufacturing in the US is a positive for not just the physical parts of the economy but also confidence and consumer psyche. However, about 12% of the US economy is manufacturing, the non-manufacturing data on Thursday night however encapsulates the largest component of the US and if investors see a print of a similar size, the dramas in Washington will be seen as a sideshow rather than a core issue.

Confidence and manufacturing data was a key support for the Asian region yesterday; the official China manufacturing PMI data was solid at 51.1 and a slight improvement on last month, having seen a fairly hefty downgrade to the private survey on Monday – any sign of ‘stabilisation’ is going to benefit risk assets and risk markets. It explains why the ASX had a 0.6% turn around in the middle session.

Japan also helped drive the region yesterday with Tankan manufacturing index reaching its highest level in six years and almost double the estimated print. The data sent the yen falling and the Nikkei up as the Japanese start to believe in Abenomics.

Concerns over strengthening AUD

The news out of Asia was positive for the equity markets, but what was really affected yesterday was the AUD. With the RBA removing the easing bias from the statement and (as expected) leaving rates on hold, the expectations for a November rate cut dropped to 26%. This, coupled with Asian data and a rush to the exit in the USD, saw the AUD jumping to 94 cents – up 0.9%.

The RBA remains concerned about the rise of the AUD, however talk about record clearance rates and over lending to retail real estate investors being a more penitent factor means the RBA is unlikely to intervene in the currency – we are therefore very wary of a potential rise in the AUD as the USD depreciates and Asia hums along.

Ahead of the Australian open

Ahead of the open we are calling the ASX 200 up 22 points to 5229 (+0.43%) while BHP’s ADR is suggesting the stock will drop 15 cents to $35.34 (-0.42%), even after the US markets bucks its downward trend for only the second time since the Fed ‘no taper’ meeting.

What is clear from US trading more than anything is misunderstandings that lead to volatility are being punished. If the Fed had held the line in April it would have seen a rally in equities, now with expectation shifting in the other direction, the ‘no move’ was seen as a negative as it suggests the economy is not strong enough in the eyes of the Fed.

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