It’s amazing what traders and investors will do for 22 basis points (bp) of additional yield, but that to some extent is what is compelling FX investors to push the AUD/USD through the 80c mark, and with it, we see a clear talking point for traders with focus on the fact we have seen further gains in the AUD.
This is obviously partly a USD story, but the USD has had mixed moves overnight and we can see the USD index flat on the day, although this is a reflection of a largely unchanged read in EUR/USD, which seems to have been held back by comments from ECB members about the recent EUR strength. USD/JPY is also finding good upside into ¥111.18 and although little change is expected, there is a growing air of anticipation about next week’s BoJ meeting, which is something we haven’t said for a while.
Looking around G10 FX we can see GBP, NZD and AUD all doing nicely with gains of around 0.5% on the session, although the USD is clawing back some ground as I type. I am very much interested to see if cable can break $1.4000 and AUD/USD can reclaim the figure through today’s December Aussie employment report at 11:30 aedt (15,000 jobs eyed, unemployment rate remains at 5.4%) and also China GDP (6.7%), industrial production, retails sales and fixed asset investment due at 18:00 aedt.
What’s interesting with the AUD is that interest rate markets are moving in favour of AUD appreciation (see Bloomberg chart below), and it isn’t just about the additional yield premium investors can pick-up in the Treasury market if they want duration. If we focus in the interest rate markets we can see the yield differential between the Australia 90-day bill Dec 2019 contract and December 2018 pushing out to 37bp, the highest since March 2017 and a decent repricing since 29 November when markets were pricing in 23bp of tightening during this period from the RBA. Now if we compare moves in US interest rates, in this case, Eurodollar futures, we can see the difference between the December 2019 and December 2018 sitting at 21.5bp. So we can see that further out the curve, interest rate markets have actually been moving more aggressively in favour of AUD appreciation.
Red – AUD/USD, Blue – yield differential between Aus and US interest rate futures (December 2019-18)

(Source: Bloomberg)
Can that continue? We shall see, but AUD/USD is entering what was a key sell zone in both July and September 2017 and it’s now partly the RBA’s job to assess the interest rate pricing and whether this seems appropriate for their outlook. Also keep in mind that ‘real’ (or inflation-adjusted) yields in Australia are also moving higher, and the Aussie bond yield curve has not seen the flattening as they have in the US, while the strength in the CNY is also a key factor.
Another supportive factor of risk assets (which we can claim the AUD is one) has been the moves in US equities, where after a decent reversal lower in price yesterday, we have seen the bulls showing their complete dominance again. It looks unconvincing whether we will see a close above 2800 on the S&P 500, with traders focusing on earnings from Goldman Sachs (GS) and Bank of America, although neither shot the lights out and numbers from GS were actually disappointing. We look forward to numbers tonight from Morgan Stanley, while IBM report at 08:00 aedt tomorrow morning and could influence Dow futures.
There has been a focus on the US debt ceiling debate and that looks touch and go at this stage, although looking at short-term US T-bills, there has been no real moves seen and traders will continue to watch the saga with growing interest. US economic data has been fairly good, with industrial production printing 0.9%, with capacity utilization at 77.9%, but neither is really a major equity positive, while there have been signs of wage pressure if the Beige Book in some of the regions. Looking around the market we can see strong moves from tech, staples and energy also caught a nice bid, in fact, all sectors in the S&P 500 are trading in the positive, with 82% of stocks higher on the day and strong value traded through both the S&P 500 and Dow.
One thing we can say about 2018 is that the moves in equity markets are not boring, even if implied volatility is still low and the VIX is sitting around 11%.
Another interesting debate is around the continued underperformance of the ASX 200, with the index -0.8% year-to-date, relative to a 6.9% gain in the Hang Seng, 4.9% in the Nikkei 225, 4.9% S&P 500 and 3.1% for the Eurostoxx 50. Granted, these moves imply investors have tracked these markets without hedging their currency exposures and if we adjust for the AUD strength things do look different, and although the outperformance is still there, it’s not as dramatic. That said, there is still good opportunity in the domestic market, but if one is looking at tracking an index on a passive basis then the trend is certainly not with the ASX 200 and one has to be in Asia, with the Hang Seng the superstar of 2018 and looking likely to smash through 32,000 on the open and our opening call sits at 32,219, with the Nikkei also looking strong with an open some 250 points higher (or 1.1%).
Aussie SPI futures are a meagre 10-points higher and we see the ASX 200 shaping up for an open at 6024 and my own view is that moves into 6045 today should easily cap any rallies here. Interestingly, CBA’s ADR suggests the bank may actually fall 0.4% on open and this would make some sense given BHP looks set for a stronger open (its ADR is currently up 0.7%) and energy will also put in a few points into the index. REITs and other bond proxies may struggle a touch, but we should see the downside as fair well contained.
Bitcoin and the raft of other cryptos continue to attract strong flows and media interest and price action is messy and erratic. The low of 9164 has been well supported, but there is no conviction to push price through 11,000 and there is a genuine battle underway to establish some sort of firmer trend, although clearly that trend right here is lower. There is a lack of clarity about the regulatory landscape and regulators are making it harder and more cumbersome for retail ‘investors’ to be involved in Bitcoin, specifically in Korea and China, and this is making the product far less attractive. Not to mention the losses that are being felt from those who bought and held in November and certainly December and many are finding out that nothing goes up in a straight line forever and that when investing and/or trading you need a plan to manage risk at all times and one simply can’t bury one’s head in the sand.
The far right hand column shows various global indices in AUD terms

Originally published by Chris Weston, Chief Market Strategist, IG