Intraday Market Thoughts Archives

The latest economic numbers in Australia point to a stunted economy but there are also signs this could be the bottom. In FX trading on the US Thanksgiving holiday, the dollar didn't get any love as it was the laggard on the day as the yen led the way. Japan's Oct CPI rose 0.3% y/y, beating expectations of 0.2% and previous 0.0%. The Premium Insights have two GBP trades ahead of Friday's release of UK Q3 GDP revision.

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Yesterday's Australian capex numbers were the worst in 30 years of records. Private capital expenditures fell a whopping 9.2% compared to the -2.9% consensus. The immediate reaction was a 40-pip decline in AUD/USD but it's stabilized since.

That's two poor readings for Q3 ahead of the RBA decision on Tuesday and GDP on Wednesday. What's impressive is that the market hasn't shuddered despite such scary numbers. If the Aussie can make it past the RBA and GDP without another push lower, it's a good sign that the worst is behind for the Aussie.

China and commodity prices will continue to be factors to watch but barring surprisingly weak news, the soft hands have probably already exited Australia. Once Q3 is in the rearview mirror, the RBA may look towards the middle of next year and an improvement in the non-mining sector of the economy.

Note that that in Sept/Oct/Nov there has been a series of higher lows in AUD/USD. The employment report was probably a mirage but AUD has been hit by some terrible news including 6-year lows in copper prices and the neverending decline in iron ore. We often ask: If something can't fall on bad news, why should it fall at all?

The major story on Wednesday was a leak from the ECB but with just 8 days to go, it's concerning how little has been decided. The kiwi was the top performer while the Swiss franc lagged. Aussie is falling across the board following worse than expected decline  in Q3 and plannned 2015-2016 capex. The link to the English Premium Video Analysis is found here and the Arabic Video is found here.

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ECB sources spoke to Reuters and it was revealing how many soft ideas they touched on. A two-tier deposit rate depending on how much is parked at the ECB, municipal/regional bond buying and buying bank loans were floated in a story that sent the euro more than 120 pips lower to a fresh seven-month low.

The market may have gotten the initial reaction wrong. In a week the ECB needs to make a decision and implement a plan. There might not be enough time to sort through these ideas. If there are complications, the ECB may be comforted by the euro at 1.06 and decide to only unveil part of the plan while hinting at more in January when more work is done. That could create a quick EUR/USD short squeeze to 1.10.

The US headed away for a long weekend on Wednesday and that leaves flows to dominate ahead of month end and the major announcements next week. Crowded USD longs were closed out in the final hour of European trading creating a minor reversal.

US economic data included new home sales (soft), U Mich final sentiment (soft), jobless claims (soft), Markit services (strong), PCE inflation (soft), consumption (soft) and durable goods orders (strong). The US dollar showed no strong reaction to any of the numbers.

The Australian dollar is falling across the board after Q3 capex tumbled 9.2% --the biggest fall since 1989--vs an expected decline of 2.9%--from -4.4% in Q2. Planned capex for 2015-16 came at A$120.4 bn, matching consensus of A$120 bn.

AUD has been resilient in the past day despite a soft construction report. That data puts a downside skew into today's number because it samples from the same industries.

Oil rallied Tuesday after Turkey shot down a Russian jet. The Australian dollar was the top performer while sterling lagged. Australian construction data and the BOJ's Shirai are due later. Appropriately, the best trade of the Premium Insights' 4 profitable trades has been the GBPAUD short, which is currently over 170 pips in the green.  

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Russia promised 'a package of measures' to respond to Turkey after a Russian jet was shot down near the Turkey-Syria border. However the defense minister stopped short of calling it an act of war and instead said it was a 'hostile act.' That helped to calm nerves and US stocks erased an early fall to finish slightly higher. The oil market was more skeptical, with Brent finishing up $1.20 to $46.04.

The FX market reaction to violent geopolitical developments is virtually always to buy then yen. It kicked higher when the headlines hit but without any follow-through. That could change if Russia responds with might or some other escalation of the conflict. But the easier way out is to continue to bomb Turkmen in Northern Syria to arm Assad's forces and use them to retaliate while disrupting natural gas supplies.

In any case, rhetoric surrounding geopolitical violence among world powers almost always far exceeds the economic consequences. Russia is making efforts to disrupt Islamic State oil exports but even if that supply was totally eliminated, it's negligible on the world stage.

Crude retraced almost 50% of its November decline in the past three sessions but it's little more than an oversold bounce with nothing changing in the (over) supply picture. To underscore the downside, the API reported a 2.6 million barrel per day increase in storage last week compared to the 1.2 million expected in the official government data due Wednesday.

In the near term, Australian data is in focus. At 0000 GMT, Oct skilled vacancies data is due and 30 minutes later the Q3 construction work report is scheduled. The later is expected to show a 2.0% decline but a better reading would underscore a resilient economy and emphasize that the RBA is comfortably on the sidelines.

The other event to watch is at 0100 GMT when the BOJ's Shirai makes a speech in Matsue. Suggestions the BOJ is comfortable with the economy could weigh on USD/JPY.     

Will the Fed raise its discount rate at its previously unscheduled meeting for today?  Thursday's post on the Federal Reserve's website that “an expedited, unscheduled meeting of the Board of Governors of the Federal Reserve to review the discount rate” will be held today (Monday) at 11:30 ET (16:30 London/GMT).  The discount rate, the rate at which banks borrow from the Fed's discount window is set by the Board of Governors, rarely used by the banks. This must not be confused with the fed funds rates, which is set by the Federal Open Markets Committee.

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Speculation that the discount rate will be raised today stems partly from the decision to schedule the meeting as recently as last Thursday. The other reason to expect a possible hike today is that 5 of the 12 district banks voted for a rate hike at the September meeting, with the hawks being the district banks of Philadelphia, Cleveland, Richmond, Kansas City, and Dallas. Will the balance be tipped in favour of a hike by New York and Atlanta?

The discount rate was last raised in February 2010, one month before the end of QE1, a program, which was followed by QE2 eight months later. Today, the discount rate stands at 0.75%, compared to the 0.25% for the funds target. If the Fed is intent on raising rates in December by 25 bps, it could well hike the discount rate to 1.00%, thus, maintaining the differential at 25 bps. Such strategy would bring about a highly telegraphed December hike in the Fed Funds rate, thereby, more likely to reduce any upward USD shock.

A rapid USD rally should be expected from a discount hike today–even if the rate is little utilized by banks—but it is uncertain whether such gains would last as the impact on equity markets must also be considered. If the discount rate is held unchanged today, the odds remain well above 65% for a December lift-off. But do not forget the upcoming reports on core PCE Price Index, the November jobs and the outcome from the ECB policy meeting.

I continue to expect a December rate hike is far from accomplished, regardless of today's decision on the discount rate.

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