Although most describe the RBA as neutral, comments from Governor Glenn Stevens are taking the RBA right to the edge between neutral and hawkish.
Stevens is currently in Hong Kong addressing the Asian Investment Conference, which also has the likes of St Louis Fed President Jamie Bullard speaking on central bank policy and economic outlook.
It has been interesting to witness the reactions to what Stevens’ inferred in his speeches yesterday. In his first address, he stated clearly that there are encouraging early signs of a handover between the mining space and domestic consumption, and he believes that the Australian economy may strengthen later this year. He moderated this bullish outlook with this statement: ‘this outlook is…a balance between the largest negative force of declining mining investment and the likely pick up in some other areas of demand helped by very low interest rates.’
The reference to low interest rates has certainly had a profound effect on market perceptions of a rate rise. The AUD move through 34 pips on his remarks, as the ‘low rate support’ comment was then reiterated at his 5:00pm address which saw the AUD’s momentum increase in the European and US trading sessions, touching $0.9245 at the top before resting at the current level of $0.9223.
This is an interesting development as the bank has been actively jawboning the AUD lower over the past year. Stevens did allude to the fact that the lower the AUD over the past six months had helped the Australian economy along with global macro conditions. But unlike previous months where the AUD and its historically high value have received a large amount of attention from Stevens, he merely mentioned its moves and moved on; the jawboning phase appears over.
From that perspective, the AUD is likely to continue to follow the technical uptrend and could even see the central bank fundamentals coming in behind to give it an additional boost, as jawboning looks to be finished and rate hike bets are only going to increase.
Treasuries and currencies
I have been keenly watching the US bond market over the past week after the FOMC moved its economic projection of rate rises forward and up in 2015 and 2016. I believe that over the coming 18 months the prospect of a breakdown in high yielding equities for the higher yielding, and what will be cheaper US treasuries is coming; yield hunters will lock in profits and look to lower risk in similar yield plays. This will see a breakdown in the carry trade and the repatriation of USDs that have been globally dispersed, as hot money that entered the market from QE returns; watch this space.
Overnight a very strong five-year auction squeezed out US fixed income and took out USD long positions according the Goldman Sachs. This triggered stops in USD/JPY, pushing it to 101.92 and the USD/CAD snapped lower, taking out the support band at $1.112 to drop to $1.108. These two pairs had been a clear play on central bank differentials with the BoJ the most dovish in the G10 followed by the COB; it has been a clear play for several months, but the appeal of US treasures is clear from what happened overnight. The demand from foreign investors for treasuries will be a trade to watch out for.
Ahead of the Australian open
We are currently calling the ASX 200 down 39 points on the 10am bell (AEDT) to 5337. This will see all of yesterday’s gains being given back, and with the Citigroup failing the recent Fed stress test it’s likely the financial services space will increase the sell-off. BHP lost ground in both London and New York and this will translate to the Australian listing despite the fact iron ore continues to edge higher. There is no Asian macro data today that is likely to be overly market sensitive, so with the JPY moving higher, no new stimulus talk from China and the end of the quarter fast approaching, be prepared to see irregular trading on window dressing.