The Trade Week ahead (and back)

Several events, market set ups and market differentials continue to support my trade theory that all flows lead to the USD and away from risk currencies. Despite recent data in Australia, the AUD is one of those likely to see further outflows. Here is my reasoning

Last week:

  • AUD jumped dramatically off the back of Australia’s employment print, which for the first time in years, saw a significant fall in the underutilisation rate falling to its lowest read in 5 ½ years illustrating that the mass jobs creation of the past 24 months is finally eating into the slack in the employment market. The employment change smashed expectations with 44,000 jobs being created versus consensus of 18,000 jobs. More importantly is the quality of the employment change; Australia has now seen approximately 105,00 full time jobs created in 2018, couple that with approximately 271,000 full time jobs in 2017 which explains why we are finally seeing some positive news on underemployment and underutilisation, the questions is can this structure shift translate into wage growth? The sub-categories in the GDP and PMI’s suggest it can. The unemployment rate held at 5.3%.

If prints like the one just seen in August continue unemployment is likely to head to 5% over the coming 6 months, the underutilisation rate will fall below 13% and wages will rise – it will make the RBA pleased and will cause the AUD to spike higher on the employment releases. However;

Next week:

  • The Federal Open Committee will meet next Thursday to increase the Federal Funds rate for the 8th time in 2 ½ years and is likely to continue to increase rates every quarter until December 2019, therefore returning the Federal Funds rate to the FOMC’s ‘neutral rate’ ahead of schedule. The Fed remains the only Central Bank currently on a strong tightening bias, it has an economy that is booming and a White House administration that is only fueling this further with fiscal stimulus.

This means: ‘all medium term flows are heading State side’ and the recent ‘breather’ in the USD is just that, a breather. Yes, there are risks building in the global marketplace but the remaining constant is the US economy- and thus the USD.

This week:

  • Presents as a week to either reposition and/or re-calibrate against a risk thematic currency. From an AUD perspective, there are several factors counting against it.
  • First being the Australian-US 10 year bond differential which closed at -40 basis points Friday, this is the lowest read differential since the third quarter of 1981, the risk premium that Australia once enjoyed is long gone and the AUD will suffer for it.
  • Second, the White House looks certain to enact the US$200 billion worth of additional tariffs on China this week. Short term negative risk on the AUD
  • Third, an EM slow down, PMIs, industrial production and fixed asset investment are all slowing to decade or multi-decade lows. Australia main trading partners.

All this reinforces my view that over the medium term the AUD will be knocking on the 69 cent handle.

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