AUD: Supported By Strong Move Higher In Bulk Commodities

The mood, certainly on social media and to an extent on trading floors, suggests bearish sentiment in on the rise, even though US equity markets have really only fallen modestly and there really hasn’t been any one piece of news that been catching attention. US Q4 earning season seems the next likely catalyst, with expectations of strong earnings growth keeping the sellers at bay..for now.

The lion’s share of the overnight news flow has centred on Hollywood heavyweight Meryl Streep taking on Donald Trump to an audience of 20 million people. Donald Trump predictably out with a strong rebuttal. We have also heard fairly hawkish comments from Fed president Dennis Lockhart (a non-voter in 2017) calling for two, potentially three hikes in 2017. But more importantly were comments from Stanford University professor of economics John Taylor that the Fed were behind the curve when it came to interest rates, although if we look at the fed fund futures we can see the markets rate hike expectations have dropped a touch for 2017.

Keep an eye on future commentary from Mr Taylor though because he is looking like a potential candidate to replace Janet Yellen as Fed chair in 2018 and thus will be one of, if not the most important people in financial markets in the years ahead. He is advocating a tighter policy stance, in line with Mr Trump and that needs to be a consideration.

We have seen some modest weakness in the USD, spurred on by buying seen in the all parts of the US fixed income curve (the 5-, 10- and 30-Year Treasuries are all down 4 basis points), although the USD index is being supported by a weaker GBP/USD. GBP has sprung up as the ugliest house on the block again and the big flows have been against the AUD and NZD. GBP/AUD has had its biggest fall (currently down 1.9%) since early August and I can’t help but think this pair trades lower from here. The fact is Brexit is back firmly on the radar with the UK Supreme Court likely to hand down its verdict on parliamentary influence on Article 50 (speculated as 23 January), with the market placing a higher risk premium on GBP ahead of the 31 March deadline on triggering the start of the negotiation period.

The fact we recently saw the UK ambassador to the EU (Ivan Rogers) quit his position amid views that Brexit is going to lead to “mutually assured destruction” is not helping either. The carnage on the London railway system overnight makes selling GBP with even more attractive (said tongue in cheek) and the heart goes out to all the commuters caught up in the mess.

The AUD itself has been supported by a strong move higher in bulk commodities. In the Dalian futures space we have seen iron ore +4.7%, steel +3.8% and coking coal +4.3%. This is certainly helping positive AUD flows, with AUD/USD looking to break above the November downtrend at $0.7366. My preference though as a short-term trading call is short GBP/AUD and even AUD/NZD longs look compelling on a break above supply through NZD1.0500.

Outside of the bulks, we have seen some constructive moves in precious metals again, with both platinum and gold printing a higher high in the move that really started from late December. I am still holding a long trading bias on platinum and still view a move into $1000 to $1020 as achievable. Certainly the price action here suggests the bulls are in control and the probability of further upside is greater than downside. The same can be said for gold from here and still feel $1200 is not a stretch as a short-term target.

On the equity front we expect slight weakness in the ASX 200 and more pronounced weakness in the Nikkei after being closed yesterday. Price action in the Aussie market from 10:30 aedt is key though, as the market would have priced the various overseas leads in and had time to reflect on the state of play and calmer heads will act accordingly. Given the strong upside move yesterday, on turnover of $5.472 billion, suggesting trading desks were more suitably manned, it will be interesting to see if market participants support the likely opening dip into 5795 – it could say a lot about local sentiment. Judging by the various ADR’s we should see BHP and the oil plays open on the back foot, given US crude settled at $51.96, -3.7%. We should see an extension of the recent gains in the Aussie banks, with gold stocks a likely standout.

Keep an eye on China, with December CPI and PPI due out at 12:30 AEDT. Producer inflation is expected to increase significantly to 4.6%, although consumer price inflation is expected to say subdued at 2.2% and it’s clear that downstream producers are having to take the hit of higher input costs and not pass these onto the consumer. All eyes on USD/CNH though, as a big move higher in inflation could give the PBoC scope to tighten policy somewhat, although the focus on the housing market suggests putting up rates could send a sharp signal to property investors.