A lot of excitement around movements in the AUD at the end of last Friday and over the weekend. It looks interesting and appears to be a technical movement brought on by the trade balance on Thursday. I remain strong in the view the USD come December 2019 will be higher still, but cannot ignore short-term opportunities.
The technical – AUD breakouts
• AUDUSD – Has tested this downtrend channel several times in the past year but has never closed above it. Friday finally saw a break and close above the trendline – the risk is the Midterms and the CNH fixing but it’s an interesting development.
• EURAUD – Broke below the 200-day moving average. EUR has eased off in recent weeks as periphery states have produced weak economic data while Australia’s trade balance boomed. Again the risk here is the Midterms.
• AUDCAD – Also broke out, as oil moderated. This cross is risky: oil, the midterm and EM all shift AUDCAD around and swiftly – stops are a must.
Will be interesting to see if these break are more structural, I haven’t seen enough economic data yet that would confirm this which is why the RBA’s outlook is key.
• There will be no move from Martin Place on Melbourne Cup day however there is a sense it could ‘set up’ it’s views of 2019 and 2020 on Tuesday as after the December meeting the RBA is on its summer break until the first Tuesday of February, which has a very large timeframe considering Asia (especially China) tends to change its policy during this time.
• The 5 keys to 2019 and 2020
o Funding – the cost of capital is eating into residential housing, personal lending and the consumption of credit. The RBA will be aware that further increases in global cash markets will come home to roost in Australia which is likely to put pressure on rate calls the downside. AUD weakener
o House prices – a lower wealth effect’ will filtering into a growth figures. Will this lead to macro-prudential tweaks that were originally brought into curb housing market in 2019 and 2020?
o Inflation – 16 consecutive and counting below its target 2% to 3% band. This should create a scenario where cuts are discussed, yet is maintaining a slight hike stance.
o Employment – booming part of the economy. However, the RBA still sees slack as being a thorn in the side of wage growth, part of its charter is to support employment which it can’t do as employment growth strong – tough one.
o GDP, can private investment remain an addition to GDP or will it slide back to a subtraction in 2019? This is a China question. Watch the CNY. And, will consumption the largest contributor to GDP slide as wealth declines and wage growth remains anaemic? The RBA clearly thinks not its forecasted GDP to hold at 3.25% come December 2019.