We take a closer look at the Australian dollar with the RBA decision just a few hours away. We also look at cross-asset November performance. On the day, the kiwi led the way while the euro lagged. China's Nov manufacturing and services PMIs are both due at 1:00 GMT/London. The Caixin PMIs are due out 45 mins later. The Premium Video Analysis on the existing trades and other situations is due out. The table of content is posted below.
A top fact from November that stands out to us is this: the CRB commodity index fell nearly 7% in November and the Australian dollar was the top performer. The Aussie was bolstered by a strong employment report early but managed to hold the gains despite some soft construction and capex numbers later in the month.
One of the best indicators of underlying strength is when something can rally despite bad news. That's the case with the Australian dollar at the moment but there a two big risks in the day ahead.
The first is the RBA decision at 0330 GMT. Expectations are unanimous for no change. At the start of November the RBA highlighted that monetary policy needs to be accommodative while indicating that prospects for the economy had firmed 'a little' over recent months.
Given the mixed picture of economic data, expect similar economic rhetoric from the RBA or a bias towards an even clearer shift to neutral from dovish. That could be offset by AUD jawboning. The current statement only says the Aussie is adjusting to significant declines in commodity prices. However, the market has proven to be relatively immune from Stevens' jawboning without the threat of rate cuts so a dip may be short-lived.
AUD buyers on or before the RBA also have to consider Q3 GDP numbers on Wednesday. Before they're released, trade data is due today at 0030 GMT. A weak reading will add to the negative bias in the numbers that's already been tipped by soft capex and construction spending. The current consensus for GDP is +0.7% but the market is probably closer to +0.5% and the RBA could hint at that softer growth because they've likely got a preview of tomorrow's GDP numbers.
Overall, the RBA has weathered an impressive storm in November and that sets it up for a strong finish to the year if it can successfully navigate the next two days.
|Chicago PMI (NOV)|
|48.7||54||56.2||Nov 30 14:45|
|Markit Manufacturing PMI (NOV)|
|52.6||52.6||Dec 01 14:45|
|ISM Manufacturing PMI (NOV)|
|50.3||50.1||Dec 01 15:00|
|49.8||49.8||Dec 01 1:00|
|53.1||Dec 01 1:00|
|48.3||48.3||Dec 01 2:45|
|Eurozone Markit PMI Manufacturing (NOV)|
|52.8||52.8||Dec 01 9:00|
|Construction Spending (OCT) (m/m)|
|0.5%||0.6%||Dec 01 15:00|
|RBA Commodity Index SDR (NOV) (y/y)|
|-19.8%||Dec 01 5:30|
|Eurozone Unemployment Rate (OCT)|
|10.8%||10.8%||Dec 01 10:00|
Traders are strapped in for a jam packed week of economic news and data headlined by the ECB decision and non-farm payrolls. Monday's IMF decision on China's SDR future and the OPEC meeting also rank among the headlines of the week. The US dollar was the top performer once again last week while the Swiss franc lagged on speculation the SNB could react to a move from Draghi. The China SDR decision is up first in a busy week but we shift our gaze to some of the themes and events that could drive bigger market moves than the ECB/Fed. There are 5 Premium trades currently open, 3 of which are in GBP pairs.
Lost in the US holiday late last week was a 5.5% fall in the Shanghai Composite on Friday. A crackdown on brokerages and soft industrial profits helped to spark sales. There is also talk that Beijing has pulled its campaign to support stocks.Market moves in China can get disorderly very quickly. At any point in December, foreign investors could begin withdrawing investment because of Fed hike speculation, year end or fears about the economy. Worries about China materialize quickly and hit like a tsunami. We stay on guard.
Murmurs out of Switzerland have also caught our attention. A weekend report from the local press quoted officials from the tourism lobby pushing for a 1.15 EUR/CHF cap. Others point to comments from SNB leader Jordan last week who said negative rates “have proved very useful” as a signal he may cut the deposit rate further below -0.75%. The market has sniffed out some kind of plot as USD/CHF hit a six-year high on Friday.
The final spot to watch is oil. OPEC meets on Friday but all indications are there will be no change in quotas. We'd expect that to be fully priced into the market but it was a similar situation a year ago at the OPEC meeting and when they didn't provide support WTI crude fell to $45 from $75. Oil is precipitously close to support at $38-39 as we start the week and a breakdown could get ugly very quickly.
In the immediate term, watch for German retail sales and inflation data on Monday along with Chicago Fed. But first up is Kuroda, who hasn't given any indications lately that he's prepared to cut rates or that he wants a weaker yen. Expect more of the same when he speaks at 0100 GMT. The China SDR decision has no set time but we don't expect it to have market implications. It's been widely tipped that it will be included in the IMF basket.
|Germany Retail Sales (m/m)|
|0%||Nov 30 7:00|
|Germany Retail Sales (y/y)|
|3.4%||Nov 30 7:00|
The latest economic numbers in Australia point to a stunted economy but there are also signs this could be the bottom. In FX trading on the US Thanksgiving holiday, the dollar didn't get any love as it was the laggard on the day as the yen led the way. Japan's Oct CPI rose 0.3% y/y, beating expectations of 0.2% and previous 0.0%. The Premium Insights have two GBP trades ahead of Friday's release of UK Q3 GDP revision.
Yesterday's Australian capex numbers were the worst in 30 years of records. Private capital expenditures fell a whopping 9.2% compared to the -2.9% consensus. The immediate reaction was a 40-pip decline in AUD/USD but it's stabilized since.
That's two poor readings for Q3 ahead of the RBA decision on Tuesday and GDP on Wednesday. What's impressive is that the market hasn't shuddered despite such scary numbers. If the Aussie can make it past the RBA and GDP without another push lower, it's a good sign that the worst is behind for the Aussie.
China and commodity prices will continue to be factors to watch but barring surprisingly weak news, the soft hands have probably already exited Australia. Once Q3 is in the rearview mirror, the RBA may look towards the middle of next year and an improvement in the non-mining sector of the economy.
Note that that in Sept/Oct/Nov there has been a series of higher lows in AUD/USD. The employment report was probably a mirage but AUD has been hit by some terrible news including 6-year lows in copper prices and the neverending decline in iron ore. We often ask: If something can't fall on bad news, why should it fall at all?
|Private Capital Expenditure (Q3)|
|-9.2%||-2.9%||-4.4%||Nov 26 0:30|
The major story on Wednesday was a leak from the ECB but with just 8 days to go, it's concerning how little has been decided. The kiwi was the top performer while the Swiss franc lagged. Aussie is falling across the board following worse than expected decline in Q3 and plannned 2015-2016 capex. The link to the English Premium Video Analysis is found here and the Arabic Video is found here.
ECB sources spoke to Reuters and it was revealing how many soft ideas they touched on. A two-tier deposit rate depending on how much is parked at the ECB, municipal/regional bond buying and buying bank loans were floated in a story that sent the euro more than 120 pips lower to a fresh seven-month low.
The market may have gotten the initial reaction wrong. In a week the ECB needs to make a decision and implement a plan. There might not be enough time to sort through these ideas. If there are complications, the ECB may be comforted by the euro at 1.06 and decide to only unveil part of the plan while hinting at more in January when more work is done. That could create a quick EUR/USD short squeeze to 1.10.
The US headed away for a long weekend on Wednesday and that leaves flows to dominate ahead of month end and the major announcements next week. Crowded USD longs were closed out in the final hour of European trading creating a minor reversal.
US economic data included new home sales (soft), U Mich final sentiment (soft), jobless claims (soft), Markit services (strong), PCE inflation (soft), consumption (soft) and durable goods orders (strong). The US dollar showed no strong reaction to any of the numbers.
The Australian dollar is falling across the board after Q3 capex tumbled 9.2% --the biggest fall since 1989--vs an expected decline of 2.9%--from -4.4% in Q2. Planned capex for 2015-16 came at A$120.4 bn, matching consensus of A$120 bn.
AUD has been resilient in the past day despite a soft construction report. That data puts a downside skew into today's number because it samples from the same industries.
|New Home Sales (OCT) (m/m)|
|0.495M||0.500M||0.447M||Nov 25 15:00|
|New Home Sales Change (OCT) (m/m)|
|10.7%||-12.9%||Nov 25 15:00|
|Durable Goods Orders (OCT)|
|3.0%||1.7%||-0.8%||Nov 25 13:30|
|Durables Ex Transportation (OCT)|
|0.5%||0.3%||-0.1%||Nov 25 13:30|
|Continuing Jobless Claims (NOV 13)|
|2.207M||2.164M||2.173M||Nov 25 13:30|
|Initial Jobless Claims (NOV 20)|
|260K||270K||272K||Nov 25 13:30|