From the FXWW Chatroom: I am slightly disappointed by the lack of follow through from the GDP outcome yesterday. Let’s face it, with GDP above trend at the end of last year, above trend in Q1, and forecast by the RBA to be slightly above trend in 2016, 2017 and above trend in 2018, then we should be seeing more support for the A$. To be sure, it’s all about in(de)flation and thus August remains live. But again, I am disappointed. Same with AUD crosses – they failed to show any signs of breaking out here. Perhaps we just have to work through positioning. Perhaps we just have too many risk events over the next two weeks. I still expect to see a bit more strength here. MACD etc. are crossing up. I use 12 and 20 exponential moving averages as trend following indicators. We smashed through 12dexpma Tuesday and tested the 20dexpma but failed to trade above it last night. That tells me we have a bit more work to do. Key is thus what today’s data looks like, what OPEC and the ECB does or does not deliver and what payrolls looks like. I like AUD higher, but it looks like we will simply consolidate here. So shift back to neutral today
I was very impressed with the price action in Australian bonds post the GDP data. Both 3yr yields and 10yr yields rose around 5-6bp immediately after the data but then there was consistent and broad based buying across the term structure from both domestic and offshore investors, pushing yields back down, and closing lower on the day. Perhaps it was a delayed response to the previous day’s index lengthening, which may mean that there is little follow through. However the price action certainly provides evidential support to our oft-stated view that the 3yr yield won’t push through 1.7% on a sustained basis and that adopting a tactical buy on dips approach within the range is likely to be medium term beneficial.
Market RBA pricing has been pared back such that a full 25bp rate cut is not factored until March 2017 and the terminal rate beyond that is only a couple of basis points lower again. That is contrary to our view that the RBA will cut rates again, but in August and also that over time, pricing will centre on a 50% chance of a further cut beyond that. So there is scope for re-pricing at the very front end of the curve, especially as the central bank trigger to renew its easing cycle was inflation, not growth
So post GDP our core themes have not changed. Be long or square; buy dips to range lows (3yrs below 98.35, 10yrs below 97.70). Also, enter flatteners on any steepening impulse toward 70bp as Australia’s relative high yields continue to attract investors into the long end. That, in turn, will underpin broad AU bond outperformance, in line with monetary policy divergence with the Fed, over the medium term.
It appears the market does not want to be short NZD going into the 9 June RBNZ meeting, Given the recent history of communications missteps (resulting in unwelcome NZD gains) as well as the increasing possibility the RBNZ could remain on hold, such sentiment is rational. NZD/USD targets 0.6850 today, while AUD/NZD should continue to probe trend support around 1.0620. A break lower would then target 1.0570. Dairy prices at the GDT auction overnight were mixed and had no impact on FX markets: the 1.7% fall in key dairy product whole milk powder was well predicted by futures-based models and was balanced by the 12% rise in SMP.
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