Trader thoughts - the long and short of it

Reserve Bank of Australia (RBA) governor Philip Lowe gave traders and economists something to focus on in Sydney overnight and the man driving the Reserve Bank gave a fairly upbeat assessment of the Aussie economy.

Source: Bloomberg

Inflation is not expected to fall further, while growth is expected to remain around 3%, assisted by a falling headwind from the drop in mining investment. Dr Lowe also argued that growth of 3% is not thematic of an exchange rate that is 'too high' and this is true when you plug the key variables into the RBA’s own ‘fair value’ model.

AUD/USD has traded in a range of $0.7664 to $0.7611 on the session, although the AUD has seen better days against the JPY and NZD, with AUD/JPY gaining 0.9%, helped by a pickup in positive risk sentiment. The good-will towards the AUD may come into play at 11.30am AEDT, with the RBA set to deliver its Statement on Monetary Policy (SoMP) and expected take a cleaver to its growth estimates for end-2016 and mid-2017. Talk on the floor is that the RBA could cut as much as 1pt off these estimates, with the revision lowered to a range of 1.5% to 2.5%. It seems likely that these figures are what AUD and rates traders will be keying off today.

Keep an eye on China’s January trade data (no set time), with a view that the trade surplus should widen to $48.5 billion. The market usually never really understands how to interpret this data point, or at least if it really affects future growth reads, so I wouldn’t be expecting it to cause too much reaction in the markets.

On the equity front, we face a nice pop in Asian equities on open thanks largely to Mr Trump. The market has gotten fairly excited around commentary to US airline CEOs, such as 'we are going to be announcing something over the next two or three weeks that will be phenomenal in terms of tax' and 'we have obsolete airports and train systems and bad roads'. Trump’s spokesman Sean Spicer then pushed this notion further saying Trump’s tax rollout is 'comprehensive' and will 'spur economic growth'. Mr Spicer also mentioned we should hear Trump’s budget in a few weeks, which is interesting as there had been some talk earlier in the week that it may be pushed out until May.

The market loves the idea of tax reform, it has corporate tax cuts in its sights and if Trump can push that along with a more simplified personal tax regime, the US and global equities will find buyers. Of course, we are still waiting for further colour on border tax too, and that is something economists want in order to make the proposed cuts to corporate tax efficient. A 20% tax on US imports will raise around $100 billion a year (0.5% of GDP) and this can effectively offset the potential cuts in corporate tax. Interestingly, there seems to be a growing headwind in the US Senate for a border tax, notably on the view that it is too complicated and shuts down economic growth.

The comments from Trump have caused not just selling in the US fixed income market, notably around the five-seven year maturities, but we have seen new all-time highs in the S&P 500 and Dow Jones. The Russell 2000 has rallied 1.4%, and although this index is not yet hitting new all-time highs, if you want to express a view on 'Buy America', this is the weapon of choice given the companies in the index source a far greater percent of revenue from the US than the S&P 500. US banks have also been at the heart of the move higher today, and this may support Aussie banks on open.

We are calling the ASX 200 to open at 5690, which would put the gains for the week at 1.2%. This is certainly positive, with the market looking like we could have seen a far deeper pullback earlier in the week. The bulls have really stepped in and defended lower levels;  this is key given Aussie earnings roll in thick and fast next week. On the ADR front, we can see BHP is likely to open modestly higher +0.6%, CBA +0.5%, while WPL is eyeing a fairly flat start despite US crude price having a better time and gaining 1.5% on the session. Bulk commodities are also supportive, with iron ore and steel futures putting on 1.9% and 0.7% respectively.

Watch Qantas on open given US airline stocks have rallied strongly on Trump’s comments (to airline CEOs) that 'we want to take care of you'. US airline stocks have naturally rallied strongly.

One other area to focus on, especially if you are more FX focused, is the Japan/US (or I should  say the Abe/Trump) summit. Reports have suggested currency manipulation won’t be a key part of the agenda. However, after US Treasury Secretary Steven Mnuchin’s recent suggestions that the Japanese were playing the money market and the devaluation game, surely it has to come up when he meets with Japanese finance minister Taro Aso.

Who knows though, we may even hear of a great friendship and early signs of a free trade agreement! We have to wait until the Abe/Trump presser which is scheduled for 5am AEDT on Saturday morning.

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