Short AUD trade and comment
Wed 6/7/2017 4:24 PM MDT
Real Time AmpGFX – Comment on AUD short
Our USD/JPY short position was closed on stop with a modest profit. US yields have bounced of tech support.
Comey’s statement he plans to deliver tomorrow has been released, so there is less chance of a surprise.
The AUD has bounced significantly from recent lows. This reflects a weaker USD, in particular since the Friday payrolls report.
We view the rise in the AUD as a wash-out of excessive bearishness and short positioning. And the factors that are weighing on it are still apparent, concern over a peaking housing market, weaker commodity prices and rising financial risks in China.
We view the current levels of the AUD/USD as a better location to enter a short trade. Key risks are related mainly to a weaker USD trend that has developed this year. This remains a reason to keep positioning light and choose trade location more carefully.
Chinese iron ore prices remain near recent lows and oil price has fallen today after US inventory data.
Chinese short-term interest rates have edged higher, as have Chinese high yield corporate bond yields, so it still appears that there is domestic tightening in Chinese credit conditions. AUD is a risk barometer for Chinese financial tension.
On the other hand, Chinese equities are strengthening, with strong gains yesterday. Market is thinking about MSCI announcing an inclusion of Chinese mainland equities in their indices; to be announced on 20 June. This represents an upside risk for Chinese asset markets and the AUD.
Australian equities have been quite weak relative to offshore markets. Australian banks are dragging. AUD rebound will not have helped equities.
We are moving into a phase of Chinese data releases – Chinese trade data today and inflation tomorrow, credit growth this weekend or early next week, Activity data on Wednesday next week. Property prices next Friday.
Activity indicators fell back last month more than expected. It seems Chinese economic growth may be easing, so this data may not support the AUD.
Most analysts view of the Australian GDP report is that growth will struggle to meet the RBA’s and govt’s 3% forecast this year and rates are set to remain on hold for the foreseeable future.
Australian economic reports in recent months have tended to be stronger than expected (the Citi surprise index is +49.2, a pretty high level), so it does not appear that domestic data is a problem for the AUD at the moment.
Australian trade data today. Commodity prices have peaked in recent months. The trade figure for April may not reflect this, but should not improve further. The market is looking for a moderate decline from near a record to a still high level.
Home loan data on Friday may be softening considering tightening actions of banks and some peaking in the housing market.
NAB business confidence is due on Tuesday. This data has been quite strong, hitting cyclical highs in April. Perhaps it will ebb a bit in May data.
In contrast, Westpac consumer confidence, due Wednesday, has been relatively weak. With some negative press around GDP and housing, and weak equities recently, confidence may stay weak in June data.
Employment data on Thursday. Job growth has been strong in recent months, recovering from a weak stretch in the first three-quarters of last year.
The RBA said in their statement this week, “Employment growth has been stronger over recent months, although growth in total hours worked remains weak.”
With strong business confidence and steady growth in job ads in recent years, there is no reason to expect a weak employment report, so this is an upside risk for AUD.
US JOLTS data showed stronger demand for workers. US mortgage applications today showed stronger demand for mortgage lending for purchases (a high in weekly data since 2009).
US Fed hike next week is essentially priced-in. A third hike by year end is a bit over half priced in. We expect the Fed to stick with its forecasts (median for a third hike this year) and expect a neutral FOMC for the USD and the market.
Canada FSR on Thursday. If they show concern over their housing market and financial system, it may influence views on AUD.
Position
Short half unit AUD/USD at 0.7547; s/l 0.7623; t/p 0.7388
Wed 6/7/2017 3:14 PM
Real Time AmpGFX – sold AUD/USD
Sold half unit AUD/USD at 0.7547.
Comment to follow