September 19, 2017

Markets Today: Senses Working Overtime

GBP and CAD pull back on latest BoC and BoE utterances, helping USD move ahead again aided too by modestly higher US Treasury yields (10s +2bps to 2.23%). This pulls AUD comfortably back below 0.80. It has already traded - intra-day - through last week’s 0.7956 low.

Having been away from the screens for a good chunk of the past month, what has struck most on being back in the saddle is just how sensitive currency markets are proving to every nuance in central bank speak. An eight-big figure rally in GBP/USD after Sterling money markets moved the dial on pricing for a single quarter point November rate hike from 10% to 60% almost beggars belief. So too does a similar eight big figure move on USD/CAD between the time Bank of Canada deputy Governor Carolyn Wilkins suggested in mid-June that the BoC was thinking about lifting rates, and then pulling the trigger some three weeks later.

In trying to infer what this might means for currencies of countries where central banks have not yet signalled a readiness to contemplate higher rates, a key differentiator is positioning. Ahead of the aforementioned Wilkins remarks, speculative future market positioning in the CAD was running at record shorts; GBP markets were also running large – albeit not extreme – shorts into last week’s BoE narratives.  In contrast, AUD speculative positions are already not far off record long extremes.

AUD/USD is not going to be going from 0.80 to 0.88 if the RBA surprises us anytime soon my signalling a shift to a tightening bias. In fact, the bigger risk for the Aussie would be to the downside if the RBA were to hose down current market expectations for a first rate rise that is now fully priced for next August – not that we expect them too. The immediate point of focus here will be this morning’s September RBA Board minutes, but which we doubt will be frightening any horses (see Coming Up).

The BoC and BoE commentary that has hit the CAD and GBP overnight came from BoC deputy Governor Lane and BoE Governor Carney who spoke at the IMF.  Lane said that  policy makers will be “paying close attention” to how the economy responds to higher borrowing costs and a stronger CAD, following rate increases in July and earlier this month The comments served to push pricing for another quarter point rate rise by December down to 88% from 99% and USD/CAD down -0.8% to 1.2292. Mark Carney meanwhile didn’t downplay early rate rise risks, but did say they would be ‘limited and gradual’. He doesn’t shy away from suggesting UK incomes will be hit by Brexit, but suggest all the Bank can do about this is ensure that the hit to real income is limited by getting inflation down. That’s fine, unless of course raising rates puts the economy into recession. GBP/USD down 0.7% on Carney.

Coming Up

The main ‘known known’ event this week – the FOMC meeting – gets underway today but that is a non-event until the early hours of Thursday morning.

Here, we’ll have to content ourselves with the minutes of the RBA’s September meeting and on the data front, official Q2 House prices, the latter expected to show a quarterly rise of 1.3%, implying a moderation in annual house price growth to 9.2% from 10.2% in Q1.  The RBA has been playing up what it says are signs of housing market moderation in Sydney in particular, but this may be less evident in these quite historical price figures than the more recent CoreLogic data where auction clearance rates have been on a moderating trend since early this year.

As for the minutes, there is a suggestion is some quarters that these might show some heightened concerns about AUD strength, after the August minutes noted only that “There had been a broadly based depreciation of the US dollar. Consistent with that, a number of currencies were close to their highs of the previous few years against the US dollar, including the euro and the Canadian dollar. The Australian dollar also had risen to levels last seen in 2015”.

Since the AUD in trade weighted terms was actually a little weaker at the time of the September meeting relative to August and AUD/USD virtually unchanged, we’d doubt the September language will be too much different from last month.

Offshore this evening, we’ll have the German ZEW indicator (a survey of financial analysts), US August housing starts (small rise expected after the 4.8% July fall) and building permits. Canada has July manufacturing sales data. This wouldn’t normally rate a mention, but with markets fairly priced for another BoC rate rise in in Q4 and the AUD/CAD cross trading at its best levels since the start of the year, any scraps of Canadian data can have ramifications down under.  Yesterday, NAB’s FX Strategy team lowered its forecast for the AUD/CAD to a low of 0.94 in Q1 next year from 0.98 previously.

Donald Trump gives his inaugural address to the UN in New Yok tonight.


On global stock markets, the S&P 500 was +0.13%. Bond markets saw US 10-years +2.82bp to 2.23%. In commodities, Brent crude oil -0.31% to $55.45, gold-1.0% to $1,308, iron ore -0.5% to $71.76, steam coal -1.0% to $98.25, met. coal +0.2% to $206.50. AUD is at 0.7963 and the range since yesterday 5pm Sydney time is 0.794 to 0.8035.

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