October 8, 2015

Markets Today: Fix fixation (Redux)

The rapid reversal in post-August 11 Emerging Market and commodity currency weakness continued with a vengeance overnight.

The rapid reversal in post-August 11 Emerging Market and commodity currency weakness continued with a vengeance overnight. The Malaysian Ringgit is 3.6% up on this time yesterday and the Indonesian Rupiah 3% higher. At 0.7211, AUD/USD is now 4.1% above its recent (Sep 24) lows, and NZD at 0.6612 some 6% higher over the same period. Our FX Strategy team decided to run for cover last night and exited a short NZD trade recommendation from 21 July at break-even.

Much of this rally is predicated on a view that China will now maintain a relatively stable CNY through the rest of this year at least and following strong verbal commitments by President Xi during his recent U.S. visit. And, we’d also note, ahead of a likely IMF decision on China SDR inclusion (likely next month). See ‘Coming Up’ below for our expectations on today’s fixing.

Elsewhere in currencies Sterling recouped some of its recent (post services PMI) underperformance following stronger than expected production data, in particular versus the Euro where Germany reported an unexpected fall in its industrial output. The Canadian dollar continues to underperform other commodity currencies after another fall in oil prices, this time generated by US Department of Energy data showing a 3 million barrel addition to inventories last week as well as a 0.8% jump in production.

Into the US close, equities are in sea of green with gains averaging 0.75%. Bond yield are mostly higher, representing a loss of some of their recent safe-haven demand.

Coming Up

All eyes on the return of the daily CNY fix following an 8-day holiday moratorium. Recall that PBoC (or policy bank) intervention on Sep29 pushed USD/CNH 120pips lower to 6.3575. Christy Tan, our head of Asia Strategy, expects a 50-100 point fall in the fix in USD/CNY to around 6.3560-6.3510, which would bring the fix to the lowest since Aug 13 (two days post the August 11 step-depreciation). We’d suggest a fall to at least this level is required to validate the moves we have seen in EM currencies as well as AUD and NZD, since the 29th.

Tonight, the main point of interest today will be the September FOMC minutes, which the likes of San Francisco Fed President John Williams have told us produced a ‘very close call’ regarding the decision to hold fire on ‘lift-off’. But it may be the case that the minutes yet again prove to be ‘something for everyone’. We are also due to hear (again) from Fed Presidents Bullard, Kocherlakota and Williams, but all have spoken since the payrolls report and their views are now well known (Bullard and Williams in favour of early rates action, Kocherlakota in favour of further easing).

The BoE meets, with minutes and voting records due alongside. No change can be confidently expected. One point of interest will be whether Ian McCafferty again votes for a 25bps hike, or indeed whether anyone else joins him in this call – highly unlikely given recent indications of softening growth. Overnight the respected NIESR estimated GDP growth in the 3-months to September at 0.5%, down from an actual 0.7% in Q2.

The ECB is also meeting and while there will be no change in policy today, the post-meeting press conference with President Draghi will be of usual keen interest and where we might expect him to suggest that any additions to current QE policy settings will at least have to await the next staff economic forecasting round in early December.

Locally, at 11:30 AEDT, the RBA will publish a Research Discussion Paper: “Modelling the Australian Dollar”. We expect this will be in similar vein to the papers the RBA has previously released under Freedom of Information requests, which reviewed some of their methodologies for assessing currency valuation, focusing on the Real Trade Weighted Index (RTWI). Our most recent efforts to mimic this form of AUD modelling, using the Q2 national account data, suggests that the RTWI may have been a couple of percent overvalued at mid-year, but that the valuation gap is likely to have since closed given the more than 6% decline in the (nominal) TWI during Q3.

In any event the RBA made clear in Tuesday’s post Board meeting statement that it is happy to see the AUD ‘adjusting’ to past declines in commodity prices’ and since it notes that ‘the terms of trade are falling’ it is probably fair to say that further softening in the currency from here will be more welcome than concerning. That said, any sound bites from the publication that opines on current valuations could prove market moving.

At the same time as this, we have a speech due from John Simon, Head of Economic Research at the RBA, at the Paul Woolley Centre for the study of Capital Market Dysfunctionality Conference in Sydney. We’d be very surprised if this proves market moving.


•      On global stock markets, the S&P 500 was +0.60%. Bond markets saw US 10-years +3.71bp to 2.07%. On commodity markets, Brent crude oil -0.44% to $51.69, gold+0.2% to $1,149, iron ore +0.0% to $53.14. AUD is at     0.7211 and the range was 0.715 to 0.7235.
•      German Aug industrial production -1.2%m/m (0.2% E)
•      UK Aug industrial production 1.0% (0.3%E, -0.4%P); manufacturing production +0.5% (0.3% E, -0.8%).

For full analysis, download report:
Markets Today: 8 October 2015, (PDF, 287KB)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets


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