The Outperforming USD And Lack Of Real Wage Change
IG | Jun 19, 2017 06:17AM ET
I posed the question on Friday on whether we were in for a period of USD outperformance and I continue to feel this could be the case, although the USD Index really needs to break above 97.54 (the 30 May high) to find increased momentum. Even if this does materialise the moves won’t be felt on a broad basis and we continue to see the like of the CAD, AUDand NZD looking quite attractive on the daily or weekly timeframes.
The key thematic at the heart of so many debates is around such subdued inflation and falling inflation expectations in many major economies, that in turn is pushing up ‘real’ yields and flattening the yield curve. It’s this dynamic that is causing traders to ask why on earth the Federal Reserve raise three times in 2018 and 2019 when they are also allowing the balance sheet to run-off and it's of course why the markets are only pricing in two hikes all the way through to the end of 2019.
Additionally, even though the unemployment rate is at such low levels, and in some areas of the US we are hearing of labour shortages (revert to the recent Beige Book), we are simply not seeing wage pressures. Either way, inflation is at the heart of so many conversations, especially when it comes at a time when the Fed, Bank of Canada and Bank of England have shifted to a more hawkish tilt, and certainly relative to market pricing.
As we know, the Fed see better times ahead, but the market is not so sure and this is driving fixed income and FX gyrations.
On Friday we saw US five-year inflation expectations fall a further two basis points (or 0.02%) to 1.81% and the lowest since October and market-based inflation reads take centre stage here. Five-year inflation expectations in Europe have dropped to 1.53% and the lowest since November, while in Australia we can also see falling longer-term inflation expectations and this driving up the five-year and ten-year ‘real’ (or inflation adjusted) Aussie government bond to 39bp and 68bp respectively and the highest levels since mid-May.
It’s no surprise, therefore, to see AUD/USD actually looking quite bullish and while there is not a huge amount to drive this week there will be traders lining up to short the pair should we see a move into $0.7700 to $0.7720 and trend resistance drawn from the 2016 high.
Aside from the CAD (specifically CAD/JPY), AUD was the star performer last week in G10 FX, but we are coming back into what has been such an exceptional sell zone for AUD/USD really since April 2016.
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In equity land, it’s steady as she goes for today’s Asia open. The S&P 500 closed largely unchanged, but the sectoral moves should catch the Aussie market somewhat on the wrong foot on open. If we look at the performance of the ASX 200 last week we saw solid gains in REITS, healthcare, financials and even consumer discretionary, while we saw moves lower on the week in energy and materials. On Friday (in the US) it was energy that really outperformed, with the S&P 500 Energy sub-sector closing up 1.7%, while materials gained 40 bp.
The S&P/ASX 200 itself should open where it left off, and SPI futures are not giving us too much to work with either closing up nine points. One could make a positive that last week’s low held the prior week's close of 5677 and we can also see on the weekly chart (see below) buyers happy to step in and defend what is key horizontal support around 5675. Still, it is tough going trading the ASX 200 as price action is scatty and there is just no trend.
Just look at the 20-, 50-, or 100-day moving averages and we can see these moving perfectly sideways. Traders are happy, therefore, to trade a range in the ASX 200 and SPI futures.
Commodity markets are generally constructive for today’s equity market open, with US crude gaining 0.60% on Friday’s session. Spot iron ore closed up 0.9% on Friday taking the gains on the week to 2.5% and marking the first three-day consecutive rally since April. On the Dalian futures exchange, we saw iron ore close up 0.2%, while steel closed unchanged. BHP’s American Depository Receipt (ADR) closed unchanged on Friday and Vale's (NYSE:VALE) US-listing closed up 0.6%.
In terms of event risk for the day’s trade we get RBA governor Philip Lowe speaking as part of a panel at 09:30 aest, while at 11:30 aest we get Aussie new motor vehicle sales and China property prices.
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