Risk appetite still supported

November 5, 2013 — Mitul Kotecha

Relatively subdued trading yesterday ended with stocks higher and US bond yields lower. Our risk barometer is currently around its lowest since February 2011, signifying still strong appetite for risky assets, as also reflected by the drop in the VIX “fear gauge”. After a sharp 30+% drop since early October the Baltic Dry Index has also turned higher while gold prices are holding in a relatively tight range around its 100 day moving average at USD 1320.

There are a few releases and events to give direction to markets, with the RBA policy meeting, European Commission autumn economic forecasts, and service sector confidence surveys from the UK and US, all on tap today. Overall, there will be little to dent the positive risk bias but caution will intensify ahead of the ECB Council meeting and US employment report towards the end of the week.

Following last week’s USD rally the currency is likely to consolidate its gains over the short term ahead of Friday’s US October employment report. A dip in US yields helped by a softer US factory orders report took some of the steam out of the USD as caution crept in. A series of Fed speakers overnight did little to clarify the picture regarding the timing of tapering and thus provided little direction for the USD.

Nonetheless, despite some near term consolidation the USD looks set to gain further over the coming weeks helped by the fact that the market had already squared a lot of long positions over past weeks. A renewed increase in US yields accompanied by better economic data will help the USD’s cause but much will depend on when there is greater clarity regarding the timing of tapering. Expectations of a March 2014 may yet prove off the mark, leaving the USD plenty of scope for further recovery.

AUD benefitted from the robust September retail sales report yesterday but faces another hurdle today in the form of the RBA policy meeting. Although AUD remain a loser year to date, the currency has registered impressive gains from the beginning of September, much to the chagrin of the RBA.

Although a policy rate cut is highly unlikely today (I believe the RBA is at the bottom of its easing cycle), Governor Stevens is set to warn that the strength of the currency could warrant further policy easing in the months ahead. However, such warnings may sound hollow given worries about house price inflation and recently firmer data. Given some likely restraint in the USD ahead of the US employment report, AUD/USD will find some any losses limited to support around 0.9430.

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Data and central banks in focus

November 4, 2013 — Mitul Kotecha

Risk sentiment remains positive although there will be a test of the market’s optimism this week, with a heavy slate of data releases and central bank policy meetings on tap. A Japanese holiday today may start the week off on a quieter note but central bank decisions by the European Central Bank (Thu), Bank of England (Thu), RBA (Tue) and speeches by various Fed speakers will help stir things up.

While none of the central banks are expected to alter policy settings this week there will be plenty of attention on the ECB to see whether they open the door to further policy easing in the wake of softer data including CPI inflation last week. The rout in the EUR over recent days has reflected the expectation of a shift in ECB stance, with the currency likely to continue to edge lower as the meeting approaches.

On the data front, US numbers have looked somewhat perkier, including the ISM manufacturing survey at the end of last week which beat expectations, helping US 10 year Treasury yields to edge back above 2.6%. This in turn has boosted the USD and will likely help to keep the currency supported in the short term.

However, there will be some caution ahead of Friday’s October employment report, which is likely to look decidedly weaker. The expect the impact of the government shutdown to manifest itself in particular in the unemployment rate, which is set to increase to move higher. Aside from the jobs data, US Q3 GDP and October Michigan confidence are on tap.

In Europe, the European Commission will release its Autumn economic forecasts, with deficit forecasts for peripheral countries a particular focus.

In Australia a slate of releases including retail sales, which revealed a much stronger than expected 0.8% monthly increase in September are on tap. The sales data provides more support to the view that the RBA will be disinclined to ease policy further although the relative strength of the AUD will still give the central bank some cause for concern. September trade data and October jobs data are also scheduled for release this week. AUD will find some support from the sales data this morning but will face headwinds from a generally firmer USD.

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