Corrective Forces, Led by the Aussie, Weigh on Greenback

Narrow ranges in the foreign exchange market continued for the most part, and the US dollar is a little softer.  The Reserve Bank of Australia did not talk the Aussie lower, and the data were better than expected.  This sent the Australian dollar sharply higher.  Its 1.25% gain is the biggest in two months.  This coupled with gains in Chinese stocks (Shanghai Composite + 3.7%) and firmer commodity prices, including oil, are helping to lift the dollar-bloc currencies more generally. 

The Australian dollar is trading at eight-day best, just below $0.7400.  It had fallen to fresh multiyear lows at the end of July near $0.7235.  The RBA left cash rates unchanged at 2.0% like nearly every had expected.  In past statements, it argued that a weaker currency was both necessary and desirable.  This time it recognized that the Australian dollar had depreciated in line with key commodity prices. 

Separately, Australia reported stronger than expected retail sales and a smaller than expected trade deficit.  June retail sales rose 0.7%.  The consensus was for a 0.4% increase.  The May series was revised to 0.4% from 0.3%.  This put Q2 real retail sales up 0.8%, twice what consensus forecast.  The June trade deficit was A$2.933 bln, just less than expected, though still larger than the downwardly revised A$2.677 bln deficit in May.   Exports rose 3% while imports rose 4%. 

Caution is still in order. Today's Aussie gains are corrective in nature.   It is obvious that RBA policy must remain accommodative.  Monetary policy in the US and UK will shift in the other direction, even if the precise timing is being debated.  Moreover sentiment may prove fickle if the employment data later this week disappoints.  The Australian dollar has not closed above its 20-day moving average since June 25.  It is found today near $0.7365. 

A poor milk auction later today in New Zealand, which sets up for a disappointing Fonterra meeting later this week, could see the Kiwi stall in front of its 20-day moving average (~$0.6625).  The US dollar peaked near CAD1.3180 yesterday and is consolidating the move today.  Thus far, it has held above CAD1.3100.   Sentiment is poor as it has become clear that the Canadian economy is the worst performing of the high income economies here in 2015.  It has contracted each month this year.  Monetary policy divergence with the US, weak oil prices and the political uncertainty raised by the October election may limit corrective gains in the Canadian dollar. 

The news stream has been otherwise light.  Despite expectations for a supportive news on Thursday, sterling is not participating in the correction against the dollar today.  The disappointing construction PMI has kept sterling flat.  The consensus had expected a small rise from the June reading of 58.1.  Instead, the construction PMI slipped to 57.1.   Sterling remains inside yesterday's range, which was inside last Friday's range. 

There are a couple of other themes investors are following.  First we not that trading in most Greek stocks is calmer today.  The Athens Stock Exchange is off 1.6%.  However, banks are struggling to find a "clearing price" and financials are off 14% today.  At its worst, the index of the top four banks was off 29%, after a 30% decline yesterday.  Utilities are up 8%, and industrials and energy are up more than 6%. 

Second, Chinese stocks advanced, with the Shanghai Composite snapping a three-day down draft.  Chinese regulators had already banned buying and selling shares on the same day.  After the markets closed yesterday, it announced a ban on intraday shorts as well.  That is one cannot short a stock in the morning and buy it back in the afternoon.  Chinese regulators also froze a little more than three dozen accounts as they crack down on algorithmic traders  they blame for disrupting market stability.   The policy response to the price action, more than the price action itself, will likely encourage international fund managers to continue preferring the ADRs and H-shares to the mainland markets.  

Third, although they are reported individually, and do not have much impact on trading, we note that the US reported strong July auto sales.  The 17.46 mln unit pace compares with 17.11 mln consensus expectation.   This is the third consecutive month above the 17 mln mark and the first such streak since Q2 2000.  It bodes well for headline retail sales.  Strong sales, especially by US brands, which gained market share, will also underpin production.   The US reports factory orders, which outside of some response to the headline, is not a market mover, with durable goods orders out earlier, and the market is no longer focused on the Q2 data.  

Lastly, the default of Puerto Rico yesterday is a talking point, and compare/contrast with Greece seems popular.  However, PR’s default is localized and does not have the existential quality of the Greek drama.  While the world sees it as a sovereign default, fourth largest (after Greece, Argentina, and Russia), the US sees it as a municipal failure.

Corrective Forces, Led by the Aussie, Weigh on Greenback Corrective Forces, Led by the Aussie, Weigh on Greenback Reviewed by Marc Chandler on August 04, 2015 Rating: 5
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