Rising AUD would complicate rebalancing of the economy

September 20, 2016

European Outlook: Asian stock markets are narrowly mixed, with some bourses swinging between gains and losses, as traders hold back ahead of tomorrow’s FOMC and BoJ announcements. The Nikkei closed down -0.16%. The bullish sentiment on European stock markets yesterday that was underpinned by hopes that the BoJ could add some stimulus and a pick up in oil prices, already fizzled out in the later U.S. session as the oil prices dipped again and with the front end WTI futures falling further today and threatening to fall below USD 43 per barrel, risk appetite has faded. U.S. stock futures are posting slight gains, but the FTSE 100 is down, suggesting that European markets are poised for a correction in catch up trade. The European calendar is virtually empty.

RBA Minutes: “Rising AUD would complicate rebalancing of the economy”, following slow down on mining investment. The decline in the AUD since 2013 has “continued to support traded sector of economy”. Cost pressures and wage growth set to remain low and little change expected in unemployment in coming months.  “Economy growing in line with potential” and current stance on policy “consistent with growth and inflation targets”.  Looks like its neutral for  longer and same tone as other “data dependent” central banks. AUDUSD 0.7540 and capped by the 20 DMA.

German PPI: the German PPI for August missed expectations coming in at -0.1% (0.0% expected). Slightly softer than hoped and not good news for ECB. EURUSD remains in tight overnight range pivoting around 1.1170.

U.S. NAHB Homebuilder sentiment index jumped to 65 in September: This was up 6 points from 59 in August (revised down from 60 previously). It’s the highest since last October, which was also a 65 print, and was 61 a year ago. The 2016 range has been from 58 to 65, and over the past ten years has ranged from 65 to 34  over the past decade. The future sales index also rose to 71 from 66. The index of prospective buyer traffic improved to 48 from 44. All four regions posted gains, led by the West which soared to 82 from 68.

FX Update: All quiet on the forex front, with the main currency pairings having posted ultra narrow ranges as market participants remain on the sidelines ahead of tomorrow’s Fed and BoJ policy decisions. Consensus expectations are the Fed will refrain from easing,  while there are some expectations that the BoJ to trim its -0.1% reserve deposit rate further into negative territory while skewing QQE purchases toward the shorter and middle parts of the maturity spectrum to facilitate curve steepening, with the aim of mitigating the negative effects the program has had on financial intermediation. 60% of respondents to a Reuters expected the BoJ to move this week, though there was some discord among those anticipating action in the extent of what the central bank will do. With the costs and benefits of the three-year old QQE program fading, many expect a shift in policy focus to interest rates and NIRP. How markets react is a tough call, though we think the risks for USD-JPY are to the downside. Past BoJ easing measures in the Abenomics era have generally failed to weaken the yen, and the central bank would have to be aggressive if it wants a weaker currency.

Main Macro Events Today        

BOJ Outlook –  The two day meeting started earlier today and the announcement and press conference are scheduled for 03:00 GMT on Wednesday. There are expectations for a further cut in deposit rate and an expansion of the QE asset purchasing facility. However, in recent days there has also been market chatter that the BOJ may be concerned about the sustainability of its current stimulus programme.

FOMC Outlook – The two day FOMC meeting starts later with the announcement and press conference scheduled for 18:00 and 18:30 GMT respectively on Wednesday. There is little chance of a rate hike this week. The lack of any indication from the FOMC that another tightening is on the way is one of the main factors suggesting policy will be left on hold for now. Additionally, recent data reports haven’t gone the Fed’s way, with weakness in employment, retail sales, and manufacturing, along with still low/moderate inflation trends.

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