Australian Markets Weekly

In their most recent quarterly RBA Bulletin released last week, the RBA published a summary of their business liaison program, how they use that to stay abreast of current business conditions and how it has been invaluable in providing warnings of any sudden changes in the business cycle.

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Aussie on my mind

In their most recent quarterly RBA Bulletin released last week, the RBA published a summary of their business liaison program, how they use that to stay abreast of current business conditions and how it has been invaluable in providing warnings of any sudden changes in the business cycle.

Your correspondent has, this past fortnight, been travelling across the wide brown land speaking with clients in Western Australia and, this past week, in Brisbane. It’s always timely to take the local business heartbeat and get a sense of how business is travelling.

Domestically-oriented businesses are not reporting a marked change in activity levels. However the export sector has seen further falls in export commodity prices – from bulk resource industries such as iron ore and coal – as well as pressure on grain and sugar prices. It’s not surprising then that the future path of the AUD is a critical focus for businesses, as it could provide some financial relief that might support profitability. Certainly exporters are still frustrated by the AUD, despite the fall over the past fortnight, “what’s holding it up?”, and “when might it decline/will it decline further?”. Well and truly, Aussie on my mind.

We have been at pains to point out the continuing global influences on the Aussie, such as the relentless search for global yields, compressed levels of volatility in global markets and the attractiveness of Australian yields. In our modelling of current drivers of AUD “fair value”, it’s not been the down trends evident in iron ore or coal prices that have been influencing the Aussie, but the hunt for yields and lower volatility. The lower level of volatility, in what has been a “risk-on” environment, has supported the value of the AUD/USD.

What might spark a rise in volatility?

Your correspondent has been speaking about the solid performance of the US economy as it continues to get closer to full employment and the potential for inflation to rise. And yet, the message from the Fed seemis to be that they expect “lift-off” from current effectively zero Fed Funds rate (they currently target 0-0.25%) in 2015, with a rate of around 1¼% by the end of next year. The words in the formal statement held to their broad characterisation of the labour market as still having considerable slack. They are not signalling too much anxiety or concern. In the wake of the FOMC announcement, volatility was little changed. There was a modicum of nervousness leading into the announcement that was subsequently unwound.

Volatility continues to hold the key to further decline in the AUD. There is more than sufficient geopolitical risk across the global and far from a full upswing in global growth and yet credit continues to be favoured, providing some support for the AUD.

We expect a trend improvement in the US economy will underwrite US rate rises through the second half of 2015, rises that should see some episodes of rising bond market volatility and further US$ support. For now, the fate of the US$ continues to lie at the behest of global markets, the Fed, other central banks and pricing for risk.

Week Ahead

A light data week ahead in Australia. August skilled vacancies are released on Wednesday and Q3 job vacancies on Thursday, both of which should be consistent with a solid outlook for employment growth (although not as strong as the August 121K gain!). Also on Wednesday the RBA releases its biannual Financial Stability Review where most interest will be in the commentary on the housing market. On Thursday, RBA Governor Glenn Stevens is a panel participant at the Melbourne Economic Forum.

In China, the key release is tomorrow’s preliminary reading for the HSBC manufacturing PMI for September, while in the US the highlights are GDP, durable goods and home sales data.

Key data in Europe this week will be the September advance manufacturing and services PMI data tomorrow and the German IFO on Wednesday.

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