With one more trading day for April, the ASX has risen by 3.4% or 194 points. The performance is impressive given that banks had a week to forget. The implied data from ADRs shows BHP & Rio are set to open Monday lower by nearly 1% each.
Rate decisions from the RBA and the Federal Reserve put monetary policy in focus again this week. Both central banks are expected to stand pat. Australian policymakers may focus on the recent 1Q CPI data, where headline inflation continued to miss estimates (although core price growth has moved closer to the RBA’s target range). In the US, a “second-tier” announcement might keep Chair Powell and company sidelined. This FOMC meeting will not include a forecast update or a press conference. Officials have avoided changing the policy mix at such meetings, opting to wait for the bigger-splash quarterly conclaves introduced in recent years.
The Australian Dollar traded to the lowest levels of 2018 after falling 1.8% this week, and the pressure could remain to keep the buyers away. Since June 2017, the Aussie has traded above 75 US cents per USD, but recent Chinese industrial profits that sagged to 3.1% y/y is expected to underpin bearish momentum. The Aussie might find a lifeline if the RBA mentions its weakness disapprovingly on Tuesday. However, this appears unlikely as the central bank struggles to bring inflation back on-target.
Commodities have a wild week as global benchmark Brent crude trades at an extreme premium to WTI. Meanwhile, metals are providing the drama. Copper fell out of the proverbial bed on Friday thanks in large part to Chinese data showing industrial earnings took a sharp drop. Aluminium volatility remained elevated as Rusal owner Oleg Deripaska reportedly moved to help his company overcome sanctions-related barriers. He agreed “in principle” to cut holdings in Rusal’s holding company En+, with the view that this will allow the core business an easier path back to global markets. The prospect of returning supply pushed aluminium to its largest weekly drop since 2008 on the LME.
The Bank of Japan signalled aggressive easing will remain the foreseeable future, backing away from a forecast calling for the 2% inflation target to be reached in the 2019 fiscal year. Governor Haruhiko Kuroda said the commitment was dropped to communicate to markets that their easing policy will not end when a calendar turns, but rather that the Bank remains committed to hitting its objective. The yen traded toward 110 per US dollar, helping Kuroda appear to be in control. The BOJ’s next move may come in October when it could slowly lift its yield-curve target. Unusually low USD/JPY volatility is also helping the BOJ’s cause. It sits in the lower decile of its 52-week implied volatility range.
The US Dollar continues to drive FX market action, but not in the way that many might assume. The CFTC reported that as of April 24 asset managers held record net long EUR and MXN positions as well as record net short CHF exposure. The latter worked out well, but the rest looked painful as the euro touched the lowest level since January. Options traders have been betting on EUR losses against USD for the longest stretch of consecutive days since August.
A key headline helping the greenback to a three-month high cited gains in the benchmark 10-year US Treasury yield, which hit 3% for the first time since 2014. However, the steep slope of the front end of the US Treasury yield curve – specifically, the 3- to 24-month rate spread – is the concern for most institutions.
Asian FX may soon take another leg lower, especially against the US Dollar. CFTC positioning data showed us last week that aggregate net-short exposure was at its largest in five years. Then a big shift happened in the markets, and the US Dollar had its best week since 2016. Institutions like Citigroup and Westpac see USD strength continuing and argue the move is best played as the other side of continuation in the recent Asian FX downtrend.
SPI futures moved 42.87 or 0.73% to 5953.65.
AUD/USD moved 0 or 0% to 0.7581 - Session High: 0.7589 Session Low: 0.7532
On Wall Street: Dow Jones -0.04%, S&P 500 0.12%, Nasdaq 0.06%.
In New York: BHP -1.94%, Rio -1.07%.
In Europe: Stoxx 50 0.36%, FTSE 100 1.09%, CAC 40 0.54%, DAX 30 0.64%.
Spot Gold moved -0.11% to US$1323.31 an ounce.
Brent Crude moved -0.35% to US$74.48 a barrel.
US Crude Oil moved -0.18% to US$68.07 a barrel.
Dalian Iron Ore moved -0.64% to CNY463.5 a tonne.
LME Aluminum moved 1.34% to US$2275 a tonne.
LME Copper moved -0.61% to US$6965 a tonne.
10-Year Bond Yield: US 2.96%, Germany 0.57%, Australia 2.82%.
Written by: Tyler Yell, CMT, Currency Strategist, DailyFX