News wise, it has actually been quite an eventful night – tragically so in Thailand where a bomb blast  in the centre of Bangkok during Monday’s evening rush hour is reported to have killed least 19 people and injured more than 120. The Thai Baht is the second worse performing currency overnight (after the Turkish Lire).  Our Asia strategist Christy Tan say she expects further pressure on Thailand’s currency, equities and bonds when local markets re-open today, bearing in mind that 20% of Thailand’s debt is foreign owned.

We’d note too that in this now quite prolonged sell-off in global Emerging Markets – to which the AUD has been historically highly correlated with respect to Asia FX – it is has been the currencies of countries that are not just big commodity exporters but which also have domestic political problems that have been hardest hit (unstable government or unfolding corruption scandals – read Brazil, Malaysia, Turkey – and now in the Thailand what looks like geopolitical strife).

Partly due to ongoing pressure on Emerging Market currencies – but also a slightly softer EUR/USD exchange rate – the US dollar is modestly stronger in index terms so far this week.  This is despite a shocking miss in the NY Fed’s manufacturing index. The Empire manufacturing survey plunged to its worst level since April 2009. Details were not particularly promising, and will raise fresh concerns about a US manufacturing sector suffering from a high USD and falling oil-industry capex. That said, such extreme weakness is inconsistent with the messages from other regional surveys. This week’s Philly Fed and national Markit manufacturing surveys (Thursday and Friday respectively) will be now bear particularly closer watching.

Market fallout from the Empire survey was restrained in part by the fact that the latest US housing market reading, courtesy of the NAHB (Homebuilders) survey, rose to 61 from 60 in line with expectations and the highest reading since 2005 (i.e. before the US house price correction got fully underway in 2006 and which was the precursor to the GFC).

The data has left US Treasury yields slightly lower and Fed Funds now pricing a 46% chance of September tightening.

For those that may have missed it, yesterday NAB revised down its forecast for the AUD. We now expect AUD/USD to spend time below 70 cents, with a cyclical low of 0.68 forecast for the first half of 2015 before a modest recovery later in the year.  Anticipation of (modest) additional US dollar strength assuming the start of Fed policy normalisation is not delayed beyond 2015, ongoing negative terms of trade pressures and the aforementioned drag from rising USD/Asia FX in general – plus some allowance for overshoot – drives the current forecasts.

Coming Up

It’s very much a day of second tier economic news today, though New Zealand markets will be on tenterhooks tonight ahead of the latest Global Dairy Trade Auction and which has been one of the biggest drivers of volatility (downwards!) in all things NZD of late.  A further reduction in supply being offered into the auction by Fonterra has been associated with a rise in milk futures prices of about 8% since the last auction (and when average prices fell by 9.3%).

Locally, the RBA minutes are the highlight, but since we have already had the latest SoMP since the August meeting, and we know how the RBA is now choosing to characterise the currency (i.e., “is adjusting to the significant fall in key commodity prices”) it’s doubtful we will find much if anything to move markets.

Data wise we get the weekly ANZ Roy Morgan Consumer Confidence Index, but more interesting (unusually) will be new car sales for July, bearing in mind the Budget measure to allow SMEs to write off capital purchases under $20,000 a year.

Also of interest in our time zone (11:30 AEST) we’ll get the latest (July) China property price data and where average prices nationwide have edged slightly higher in the previous two months, albeit only really in top tier cities.

Tonight, it’s UK CPI and PPI and US housing starts.

Overnight

On global stock markets, the S&P 500 was +0.40%. Bond markets saw US 10-years -2.82bp to 2.17%. On commodity markets, Brent crude oil -1.06% to $48.67, gold+0.5% to $1,119, iron ore -0.1% to $56.66. AUD is at 0.7376 and the range was 0.7344 to 0.7389.

For full analysis, download report:

• Markets Today: 18 August 2015 (PDF, 367KB)

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

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