AUD: Price action in the AUD and domestic economics are clearly not aligned. Domestic activity over the past two weeks has, in the main, been weak, especially the NAB business confidence numbers. The fact ‘conditions’ have plummeted to a 7-year low and across the subsectors shows this isn’t just a ‘retail’ or ‘mining’ et. al. issue this is an economic wide sentiment view. The collapse in employment, profitability and trading conditions are a concern. Couple this with the accelerating declines in housing and it explains why there is general nervousness domestically. Thus, looking to the week ahead, Tuesday’s RBA meeting, the first for 2019 is forecasted to see it dropping its hiking bias to be a neutral as possible. This should be AUD negative clearly.
However, price action should remind us all that Australian domestic economics is only a very small part of the leavers that drive the AUD. There are clearly three other leavers currently:
- Iron ore being well above forecast and then spiking higher on the Brazilian disaster, clear terms of trade benefit.
- The US-China trade war is moving into a more ‘constructive’ phase. The AUD is highly correlated with the China/Emerging Markets trade.
- There are two-sides to a trading pair and the ‘patient’ Fed coupled with easing financial conditions are benefits for AUDUSD.
Don’t be surprised if the AUD natural drifts up to 73cents on USD weakness and other global positives.
GBP: Short term risks are becoming way to high – moving out positions and sitting on the sidelines. Brexit negotiations are moving into a new phase, I still see a deal of sorts being done the question is ‘when’. The March 29 deadline is becoming tight and it’s likely that Article 50 will have to be extended, this means the EU is now a key player and with it playing hard ball and Parliament playing politics it is causing GBP gyrations. Its adding to much trade risk to the coming few weeks – still have a net view of a higher GBP over the coming half year but am out of GBP crosses for now.
USD: The shift in the Fed shows two key things:
- It can be influenced by the markets – the spreads in the corporate debt markets and the changes in financial conditions have brought this on.
- The Federal Funds Rate is probably at the neutral cash rate.
The market pricing of the Federal Funds rate now has the possibility of a 25bps rate rise by December at 15% – the conclusion is the Fed is out of the market.
This creates an interesting scenario in the USD. I have expected USD moderation in 2019 and still expect this with the Fed pivoting to a neutral stance. However, with US growth holding up reasonably well it provides some attraction and could see flows shifting away from currencies with domestic or theme weakness back to US investment and thus moderation could shift slightly to a higher USD over the next few weeks.