Stronger dollar, weaker inflation could check rate hawks

Jens Meyer at the AFR says that a stronger Dollar and low inflation are likely to prevent the RBA from raising interest rates for some time:

Inflation is expected to remain below the Reserve Bank’s comfort zone when second-quarter CPI data is unveiled on Wednesday. Despite a jump in vegetable prices due to damage caused by Cyclone Debbie, economists predict consumer prices rose just 0.4 per cent over the second quarter and 2.2 per cent over the year.

More importantly for the central bank, ongoing softness in wages growth is tipped to have kept a cap on the less volatile core inflation, coming in at 0.5 per cent over the quarter and 1.8 per cent over the year, below the Reserve Bank’s target band of 2 to 3 per cent.

Rising iron ore prices helped the Aussie Dollar break long-term resistance at 78 cents, testing 80 against the greenback. This goes against the wishes of the RBA who need a weaker Dollar to assist exports and boost import substitution.

Aussie Dollar

But the RBA is in a cleft stick. It cannot lower rates in order to weaken the Dollar as this would encourage speculative borrowing and aggravate the property bubble. It also can’t raise rates when inflation is low, the Aussie Dollar is strong and the economy is weak. Like Mister Micawber in Charles Dickens’ David Copperfield, the RBA has to sit and wait in the hope that something turns up.

Source: Stronger dollar, weaker inflation could check rate hawks

Strange week on the ASX

Strange week on the ASX, with strong jobs numbers from the ABS causing a surge in the Aussie Dollar and a more optimistic outlook on the ASX.

But Iron ore continues to fall, headed for a test of 50.

Iron Ore

The ASX 300 Metals & Mining index respected resistance at 3000 and is headed for a test of primary support at 2750. Breach would confirm the primary down-trend.

ASX 300 Metals & Mining

The ASX 300 Banks index respected resistance at 8500 and is likely to test primary support at 8000. Again, breach would confirm the primary down-trend.

ASX 300 Banks

The ASX 200 has formed a broadening wedge consolidation, in a down-trend. Declining Twiggs Money Flow indicates some selling pressure. Expect a test of primary support at 5600. Again, breach would warn of a primary down-trend. But a failed swing (that respects 5700) would warn that all bets are off and the index may be preparing for a rally.

ASX 200

Australia: ASX rallies

Iron ore is falling.

Iron Ore

And the broader DJ-UBS Commodity Index is testing support at 82. Breach would signal a decline to test the 2015 low at 74.

DJ-UBS Commodity Index

But the Aussie Dollar rallied Friday, the large engulfing candle suggesting another test of resistance at 75 US cents.

AUDUSD

Miners finished strongly, with the ASX 300 Metals & Mining index reflecting short-term buying pressure. 13-Week Twiggs Money Flow recovered above zero.

ASX 300 Metals & Mining

The ASX 200 is testing resistance at 5800. A 21-day Twiggs Money Flow trough above zero indicates medium-term buying pressure. Breakout above 5800 is likely and would suggest another test of 5950/6000.

ASX 200

Banks also rallied, with the ASX 300 Banks index headed for a test of 8500. Expect strong resistance.

ASX 300 Banks

Perhaps this UBS report had something to do with it.

I believe that the latest rally is a secondary reaction and that the ASX is headed for a down-turn, with miners and banks leading the way. But it’s no use arguing with the (ticker) tape.

A prudent speculator never argues with the tape. Markets are never wrong, opinions often are.

~ Jesse Livermore

ASX 200 bearish consolidation

The big banks fell sharply on news of a new levy on bank liabilities in the latest budget. At this stage the ASX 300 Banks Index merely shows a secondary reaction. Breach of 8500, however, would signal a primary trend reversal, offering a medium-term target of 8000*.

ASX 300 Banks

* Target: 8500 – ( 9000 – 8500 ) = 8000

Resources stocks compensated, with the ASX 300 Metals & Mining Index rallying to test resistance at 2850/2900. Breakout is unlikely given the weak lead from iron ore. Reversal below 2700 remains likely and would strengthen the bear signal for resources.

ASX 300 Metals & Mining

Iron ore formed a bearish consolidation above support at $60. Breach would offer a short-term target of $50*.

Iron ore

* Target: 60 – ( 70 – 60 ) = 50

Selling of the Aussie Dollar continues, with a medium-term test of primary support at 71.50/72.00 now likely.

Aussie Dollar

Consolidation of the ASX 200 above support at 5800 is a bearish pattern. Breach would signal a correction to test primary support at 5600*. Twiggs Money Flow still indicates long-term buying pressure and only a fall below zero would warn of a reversal.

ASX 200

* Target medium-term: 5800 – ( 6000 – 5800 ) = 5600

‘Be careful what you wish for’: RBA could cause Aussie rout

From Myriam Robin at the Sydney Morning Herald:

The yield differential between 10-year US and Australian government bonds has shrunk to less than 30 basis points, the tightest in about 15 years, as the US engages in monetary tightening while the RBA appears set to keep rates steady at 1.5 per cent.

….This should be a serious concern for Australian policymakers, TD Securities’ chief Asia-Pacific macro strategist Annette Beacher told The Australian Financial Review, as many foreign investors are primarily attracted to the high-yield status of the local currency.

The Aussie Dollar has attracted investors over the last decade primarily because good fortune in avoiding a post-GFC recession enhanced Australia’s reputation as a stable economy. But the Aussie is still a commodity currency prone to boom-bust cycles. Dodging the 2008/2009 bullet was more a matter of luck than of skillful management of the economy. Without China’s massive post-GFC stimulus the Australian economy would have been smashed — along with the housing bubble — and the big four banks would have gone to the wall (or more likely been rescued by a government bailout). And the Aussie would be trading close to 50 cents, which ironically, despite the massive shock, may have put the economy in a stronger (and more realistic) position than it is today.

Source: ‘Be careful what you wish for’: RBA could cause Aussie rout