Markets Today: The caution and the damage done

After the AUD rollercoaster of the past two days, there’s been some follow-on selling of the AUD overnight.

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After its move down after yesterday’s GDP from above 0.76 to around 0.7580 after the data print, it’s been tracking lower again to just over 0.7560 overnight.

Part of this stems from a steady to somewhat higher USD as tax legislation reconciliation continues and even as the debt ceiling approaches, coming with an in-line ADP employment result.   A “cautious” Bank of Canada saw the loonie as the biggest loser overnight.

Sterling has also lost some ground amid report that the DUP (UK coalition partner) is digging its heels in with no deal over the Irish border question.  All that optimism of getting a deal over the Irish border question ahead of the EU Summit next week seems is now under threat.  Adding to government discord, denial by UK Brexit Secretary David Davis that the UK Government has done no impact assessments on the implications of Brexit for sectors of the British economy had pundits wondering what that referred to but not released 850 page-58 sector touted report was all about!  He said no formal assessment was undertaken into the impact of Brexit before the Cabinet took the decision to withdraw.

It was the Bank of Canada that stole the market limelight overnight.  Having hiked rates twice this year from a very emergency 0.5% to 1.00%, the central bank left rates steady, as all bar three of the 26 surveyed by Bloomberg expected.  The watchword from the central bank was “caution”: “While higher rates will likely be required over time, the Governing Council will continue to be cautious.  The current stance of monetary policy remains appropriate”.  Adding a little more to the uncertainty flavour were concerns raised over trade issues (NAFTA?) and geopolitics and that there was ongoing labour slack despite jobs growth.

Canadian bonds (and stocks) rallied, the loonie copping a pasting after the statement was released.  The market backpedalled on rate rise expectations: pricing for the 17 Jan meeting was wound back two ticks with the 7 March meeting wound back from 23 bps (near all priced) to 16 (just over 50%).

USD/CAD rallied hard by over a big figure from 1.2650 to currently trade just below 1.28.  AUD/CAD is the one Aussie cross that’s higher this morning, trading just below 0.97.  Oil prices have also been progressively giving back some ground overnight, which may have added reasons to sell after the BoC.

Coming up

Australia’s trade balance for October is being released today.  Market consensus is for a $A1.4bn surplus after the $A1.745bn in September, still a good outcome judged against the average Q3 surplus of $A1.11bn when net exports made no contribution to growth quarter.

The chart below shows the range of market reactions over the past year.  Trade is far from occupying prime billing in terms of A$ market sensitivity as the monthly current account release did in the 80s/90s, but the AUD remains somewhat sensitive to the print.

Some latitude is granted owing to variations in shipments and monthly trade flows.  Last February, when the surplus printed at a whopping $3.5bn, the AUD rose 0.34% within an hour, around 25-30 pips.  That’s a stark contrast to October when despite a higher than expected surplus, the AUD fell, but that was overshadowed by disappointing Retail Sales that day.

In October port shipments data show Port Hedland shipments marginally higher, while coal shipments have been flat-to-lower.  The LNG ramp up story should be supportive.

Commodity prices on a “prices received” basis were down 0.4% in October.  This doesn’t point to a strong risk on exports either way, but no doubt we’ll be smarter after the event.

German Industrial production tonight follows last night’s further (0.5%) factory orders growth last night.  The next data print for the USD is tomorrow night’s payrolls with focus on tax reform reconciliation.

Overnight

On global stock markets, the S&P 500 was +0.15%. Bond markets saw US 10-years -2.67bp to 2.32%. In commodities, Brent crude oil -2.53% to $61.27, gold+0.1% to $1,263, Dalian iron ore futures -2.62%, steam coal +0.6% to $97.10, met. coal +1.8% to $226.00. AUD is at 0.7564 and the range since yesterday 5pm Sydney time is 0.7559 to 0.7596. (NB: We had no price feed on the iron ore 62% fines cash benchmark today, so quoted Dalian futures.)

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