The AUD Movement...

[haunting]

FYI. This is someone else's opinion...

AUD/USD pushed above its high of 0.8263 seen in early June yesterday. Apart
from this episode, there were only four episodes when AUD/USD appreciated above
0.80 after the mid-1980s. They were 0.8960 in February 1989, 0.8475 in August 1990,
0.8215 in December 1996 and 0.9849 in July 2008. In early June, AUD/USD rose
above the high of 1996 before retreating 6.8% to a low of 0.77 by mid-July on a
correction in Asian equities.

Yesterday, AUD/USD rose to an intra-day high of 0.8440, keeping its sights on the
high of 1990. Whether AUD/USD corrects down this time after crossing the 1990
high will depend again, primarily on how Asian stock markets hold up. It will also
be helpful if today’s Reserve Bank of Australia meeting and Thursday’s Australian
jobs data affirm its relative advantage over the US with regards to its interest rate
and economic outlook.

For now, these are sufficient reasons for the markets to overlook its overvaluation.
Bear in mind that Australia’s trade balance has returned into a deficit position since
Apr09 after posting eight months of surpluses. Tomorrow’s data is likely to show the
trade deficit deteriorating for a third straight month in Jun09.

** don't forget the AUD/JPY carry trade, I believe it is still on...

 

[haunting]

FYI...

The August 12 FOMC meeting is the key event for bond markets next week.
Similar to the June 24 FOMC meeting the Fed Funds target is virtually certain to
remain at 0-0.25% and the message in the post meeting policy statement will at
best be one of very cautious optimism as downside risks to growth and risks of
deflation remain despite the likely end of the current recession in 2H09. The Fed
seems most concerned about consumer spending, which is not surprising, given
that it accounts for 70% of GDP and the household sector is in the process of
deleveraging. In May the San Francisco Fed released one research note in May that
shows that household deleveraging will likely lower future consumption growth
and another one in June that warned that a jobless recovery similar to the one
experienced in 1992 is a plausible scenario. Bernanke on July 21 in his Semiannual
Monetary Policy Report to the Congress warned that “job insecurity, together with
declines in home values and tight credit, is likely to limit gains in consumer
spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.” And last week, New
York Fed president William Dudley drew attention to falling incomes, saying that
“Weak income growth will be an effective constraint on the pace of consumer
spending” and that “consumer spending is unlikely to rise much faster than
income” because consumers are boosting savings.

Much more uncertainty again surrounds the question as to whether the Fed will
expand its Treasury buyback program and the market expects Bernanke to address
this issue. As the Fed will soon reach its Treasury purchase target of US$ 300bn and
the Bank of England yesterday unexpectedly said it will boost its asset-purchase
program to revive the economy more people in the market now expect the Fed to
do the same. As mentioned here before and argued in our 3Q09 quarterly report,
we think the Fed probably will have to buy more Treasuries because supply is
outpacing foreign and domestic demand for government bonds. The latest data
show that the Fed, through 45 buyback permanent operations since March, so far
has bought $234bn of Treasuries - boosting its holdings of T-notes and T-bonds to
$636.9. The bond market is likely to be in a holding pattern ahead of the FOMC
and, given the above, we think that a rally seems more likely than a selloff next
week. Bottom line, while there will probably not be any major changes in the
FOMC statement with regard to economic conditions and outlook, the probability
of a announcement regarding the asset purchase programs has increased since the
June 24 FOMC meeting.

 

[haunting]

Good news first - the DXY has a bounce last night, up by .95 to 78.9 - which is what the doctor's ordered. Next is to see if it can rebound to 80 or higher to remove the escalating undesirable "inversing" effect on commodities and on other major currencies threatening the economic recovery of the respective issuing country. This is probably the hope of every country that relies on the US$... including Australia.

... already the rise of the AUD is causing a not so small headache for Swan and the RBA, as pointed out by the economist in CBA this morning:

Rising AUD
hurts trade balance
It’s great news to see that Australia’s trade deficit shrank in June
to just $441m. However, that is likely to be as good as it gets over
the second half of 2009. Trade deficits are well and truly here to
stay. Not only is the continued downward revisions to iron ore and
coal contract prices eroding any likelihood of a trade surplus in
coming months but the strengthening Australian dollar is also
creating a double whammy effect on the trade accounts.
...
The latest round of trade data has confirmed that trade surpluses
are once again a thing of the past. Deficits are likely to be more
profound in coming months as exports compete with a stronger
Australian dollar and commodity prices continue to be revised
lower.

** hence Swan is talking about keeping the stimulus for a while and it probably won't be too much of an exaggeration to say the next half's numbers would be more important than the one just reported since most of the real negative factors only kicked in after June. Let's wait and see...

 

[MRC & Co]

All very interesting Haunting.

Thx for the posts.

The markets appear very very confused at the moment.

USD/equity correlation broke down, but oil/gold are stuck in the middle, undecided on what is the important factor driving them and hence, haven't latched onto a correlation as of yet.

I think this is an important juncture for the markets. The next few days should provide some fantastic trade ideas.

 

[haunting]

Geithner asks Congress for higher US debt limit

US Treasury Secretary Timothy Geithner formally requested that Congress raise the $US12.1 trillion ($A14.44 trillion) statutory debt limit, saying that it could be breached as early as mid-October.

"It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations," Geithner said in a letter to Senate Majority Leader Harry Reid that was obtained by Reuters...

** whilst the market is happily rallying away, the economists in general are not too sanguine about the so called recovery because of the debt fuelled stimulus induced nature of the "recovery". So far the major negatives they have pointed out and those that I can recall are:

1) a jobless recovery, as cautioned by a Fed governor, which means expect more housing problem when the jobless start to default on their repayment. In addition, don't expect consumption to pick up in a hurry, and with it representing 70% of the economic activities, no one really knows if this recovery will mean the end of bad times or the beginning of growth.

2) next is the taxes - another noted economist is saying with Obama piling on taxes on the rich and probably into the middle class - it will act as an economic damper and will slow down the economic activities. Combining with the change of American spending habit, where they have now become active savers... the economic multiplier effect in reverse gear will surely make this recovery look like an uphill climb

3) the underlying bad assets buried within the balance sheets of the banks will make sure they are very careful and difficult with their lending, making finance costly and hard to obtain to the medium to small businesses, thereby cutting off the lifeblood to the main job creators in the economy...

Enough... I am feeling depressed already after three points, and god know how many more yet to be raised?

But then who cares - the market is hot, and that's the only thing that matters...

 

[MRC & Co]

One positive, is a housing market stabilization, would see home owners more upbeat on their equity and could cause a fall in savings and increase in consumption, even if just at the margin.

Definately tough times for the US to get back to the level it was at with all you have already mentioned, but I'm really starting to doubt the double dip hypothesis.

 

[haunting]

MRC,

It all depends on how the second "dip" will turn out. Right now many bears are hoping to see a second bottom or further correction in the market - with some expecting a level as low as 2400 in XJO - I wouldn't want to laugh at them or rule that possibility out; but based on logic and as pointed out in one of my posts, to get another March low of 3200 or lower to 2400, the global investment climate has to match, or get much worse than the climate back in March this year where all the extreme fear factors are present to drive investors into panicky mindless selling.

At this point, with credit freeze out of the way and with many signs showing negative economic activities are decelerating, frankly the chance of an equal low, a double bottom formed in the market index is quite remote. To see a 2400 plunge in my view is next to impossible unless there's a discovery of a meteor the size of Manhattan is going to hit the earth within one month...

But what about the potential of a double dip with a higher low, ie, the scenario that the economy stabilises for a couple of quarters and then got caught up by the revelation that the bad assets buried in the banks are rearing their ugly heads again, causing another round of write down by the banks with credit freezing one more time and more rescues have to be provided by the Feds?

This is a very likely scenario and one that I wouldn't want to rule out, that is, a double dip recession, but with a lesser degree of fear and lesser negative impact on the overall economic activities. Market wise, that would probably translate into a distorted double bottom in the index (XJO) with a higher low formed somewhere at or near 34-3500 level, due to the fact that this time around many investors would see that second dip to be a buying opportunity rather than a serious calamity.

Cheers.

 

[MRC & Co]

Yes, sorry, I mean I doubt the W shape recovery and a double bottom, but definately a higher low is possible.

 

[haunting]

Currencies: For the first time in a long while, the USD appreciated last Friday when
US stocks reacted positively to better US jobs data. Even so, yesterday’s session in
Asia and US suggested that market will continue to struggle to abandon its postcrisis
habit of seeking USD as a safe haven during risk aversion, and seeking carry
trades during risk taking. And today will probably be more about risk aversion as
last night’s sell-off in US stocks filter into the region.

In the immediate term, it is the two-day FOMC meeting that matters. USD bull
hopefuls are wary that the Fed may repeat last week’s surprise decision by the Bank
of England to expand its bond purchase program. GBP/USD has fallen sharply to
1.6482 yesterday from its peak of 1.7042 less than a week ago. The Fed is expected
to let its treasury purchase program expire next month, but will maintain its pledge
to keep rates low. Not too different from the Obama administration dismissing the
need for a second stimulus package this year. After all, both Main Street and Wall
Street are expecting positive growth to return to the US economy starting this
quarter. As for the financial crisis, the Obama administration believes that it has put
out the fire.

For the USD to recover and stocks to rise, there must be a paradigm shift in the way
market trades. Just as the global crisis tied markets to a “risk aversion, risk taking”
mode, the recovery must shift focus towards relative value. On a real effective
exchange rate basis, USD is undervalued versus EUR and JPY. This is inconsistent
with their current account balances, where the US has improved while Eurozone
and Japan have deteriorated. As for the recovery, US is expected to lead, with
Eurozone and Japan lagging behind. Perhaps this is why interest rate futures are penciling in more rate hikes in the US than Eurozone next year. As emerging
markets, the rebound in equities have outperformed past crises, with worries about
China seeking to cool robust lending and its property sector. Overall, the risk of a
portfolio adjustment between emerging markets and the US in favor of the latter
cannot be discounted.

~~~~
Treasuries are booking gains ahead of the August 12 FOMC meeting, which is
the key event for bond markets this week. The 10Y yield fell 9bps to 3.77%
yesterday, recovering from the losses suffered after the better-than-expected
employment report on Friday. Yields are down despite $75 billion of government
fund-raising this week, starting with tonight’s $37 billion 3Y auction and followed
by a $23 billion 10Y auction on Wednesday night and a $15 billion 30Y auction on
Thursday night.

Similar to the June 24 FOMC meeting the Fed Funds target is virtually certain to
remain at 0-0.25% and the message in the post meeting policy statement will at
best be one of very cautious optimism as downside risks to growth and risks of
deflation remain despite the likely end of the current recession in 2H09. As the
household sector is in the process of deleveraging, the Fed is most concerned about
and consumer spending, which accounts for 70% of GDP. In May the San Francisco
Fed released one research note that shows that household deleveraging will likely
lower future consumption growth. In June another note warned that a jobless
recovery similar to the one experienced in 1992 is a plausible scenario. Bernanke on
July 21 in his Semiannual Monetary Policy Report to the Congress warned that “job
insecurity, together with declines in home values and tight credit, is likely to limit
gains in consumer spending. The possibility that the recent stabilization in
household spending will prove transient is an important downside risk to the
outlook.” And two weeks ago, New York Fed president William Dudley drew
attention to falling incomes, saying that “Weak income growth will be an effective
constraint on the pace of consumer spending” and that “consumer spending is
unlikely to rise much faster than income” because consumers are boosting savings.
Hence, guarded optimism about the future is likely as good as it gets as this point
in time.

Policy makers are widely expected to focus on exit strategies to withdraw the
liquidity injected in 2008 and 1H09, but we doubt the Fed will say much on this
topic. However, Bernanke is likely to address the question as to whether the Fed
will expand its Treasury buyback. As the Fed will soon reach its Treasury purchase
target of US$ 300bn and the Bank of England last week unexpectedly said it will
boost its asset-purchase program to revive the economy more people in the market
now expect the Fed to do the same. As mentioned here before and argued in our
3Q09 quarterly report, we think the Fed probably will have to buy more Treasuries
because supply is outpacing foreign and domestic demand for government bonds.
The data last week showed that the Fed, through 45 buyback permanent
operations since March, so far has bought $234bn of Treasuries - boosting its
holdings of T-notes and T-bonds to $636.9bn. Given the above, we think that a rally
seems more likely than a selloff this week. Bottom line, while there will probably
not be any major changes in the FOMC statement with regard to economic
conditions and outlook, the probability of a announcement regarding the asset
purchase programs has increased since the June 24 FOMC meeting.

** note this comment: the risk of a portfolio adjustment between emerging markets and the US in favor of the latter cannot be discounted.

 

[MRC & Co]

lol, that is basically the entire view I am taking on this current situaiton.

Where did you get that write-up from? Very interesting to see the exact same comments. Particularly the portfolio weighting adjustment, a perfect time to get long "Asia" as a spread against short the West.

 

[haunting]

A friend sent through email from Asia (DBS Bank)...

 

[MRC & Co]

Cheers for posting it, very good email. Are these something regular he does? It was a nice, succinct (spelling), summary.

I recieve maybe 50 emails a day from various IBs, funds etc, but none are quite as short and to the point! Usually a lot of junk in between unfortunately.

 

[haunting]

Will China sabotage the Australian dollar?

** a very good interview with plenty of info confirming what has been discussed thus far. Other than the stupid title, which generally reflects the negative bias of the journo with everything to do with China, the info provided by Hans has been most insightful and would help to provide a better understanding of the current speculative and liquidity driven AUD.

Worth a read.

The main points:

* To understand the future direction of the Australian dollar, we need to look at the economic situation developing in China
* There is a good possibility of a set-back in the Australian dollar
* While Australia's economy, and particularly our banking sector, are healthier than other countries, its reliance on Asian trading partners is an issue
* There is a paradigm shift taking place in relation to the US dollar, which is seeing increasing demand against the euro and the yen
* The Shanghai equity market is the canary in the coal mine

The SSE chart from Yahoo

 

[haunting]

More on FOMC...

Fed: The Fed meets tomorrow on policy. Policy rates will remain at 0% - 0.25% and
the Fed will again say it expects rates to remain “exceptionally low … for an
extended period of time”. There are two reasons for this: one practical, the other
driven by its mandate (and perhaps by politics). In practical terms, the Fed has to say
rates will remain low far longer than they actually will because markets will jump
the gun, defeating Fed policy. That is, if the Fed were to hint that rates would likely
start heading up in 6 months, markets would start pushing them in two. So expect
that “extended period of time” line to remain for a while. The second reason is
“real”. One of the Fed’s mandates is to promote full employment and until that
drops significantly (and not because the labor force shrank), the Fed will aim to
keep rates low. Politicians will push the Fed as hard as they can for the same and the
Fed currently faces an unusual amount of political pressure. We continue to think
that 2Q10 is about the right point to expect policy rates to start to rise.

Beyond rates per se, the FOMC focus will be on the asset purchase programs. The
Fed will soon meet its $300bn target for Treasuries and is not expected to extend this
program (which would put further downward pressure on rates). The Fed is a little
more than half-way to its $1.25trn target for MBS purchases and most expect these
purchases will continue for the time being. Hints that other asset purchase programs
may not need to go the full ten rounds would be consistent with a more neutral (/
less loose) Fed policy as 2009 proceeds.

 

[haunting]

MRC,

There are other Asian market stuffs which in my view are quite irrelevant to the Aussie markets. What you are reading in somewhere had been vetted by me...

 

[MRC & Co]

Ok, cheers.

 

[haunting]

More on FOMC...

US: 10Y Treasury yields rose 5bps to 3.71% yesterday after a disappointing $23
billion 10Y auction and the announcement from the Fed that it will slow down the
pace of Treasury purchases. In the post-meeting statement the central bank said:
“the Federal Reserve is in the process of buying $300 billion of Treasury securities. To
promote a smooth transition in markets as these purchases of Treasury securities are
completed, the Committee has decided to gradually slow the pace of these
transactions and anticipates that the full amount will be purchased by the end of
October”. Essentially the Fed has prepared the ground to end the current $300bn
Treasury buyback program, and that had the result that consensus in the market
now is that the Fed’s permanent open market operations are about to end in
October. However, the statement does no rule out further purchases after October if
needed and policy makers would have the September 23 FOMC meeting to signal
an initiative. Given that the Fed has thus far purchased $253 billion in Treasuries out
of the $300bn targeted and economic conditions are improving, the
announcement didn’t come as a big surprise to the bond market. That, however,
does not mean the FOMC was a non-event. As long as the market believes that
there will soon be no more Treasury buying from the Fed, a pillar of support for the
prices of longer-term Treasuries it removed and that means that yields are
somewhat more likely to rise in the coming months than would otherwise be the
case. Evidently, the Fed thinks that improvements in the economy are substantial
enough to take that risk. The above does not change our view that 10Y Treasury
yields will remain below 4% in the coming months because inflation is likely to
remain low.

 

[haunting]

RBA May Raise Key Rate From ‘Emergency Setting’

** this would encourage more AUD carry trades, the additional liquidity should provide more fuel to the local rally, I think.

 

[MRC & Co]

More carry trades, but at the same time, how much of this is already priced into the AUD?

This would also diminish local liquidity, which would be a negative on equities.....

 

[haunting]

On the contrary I see it will help the local equity market esp with regard to some of the higher divi yielding stocks.