WBC: Sydney Morning Meeting Minutes:
So any last thoughts ahead of the FOMC? Rich made a couple of good points earlier this morning. “With 7 of 17 members at 0.625% (i.e. 2 hikes) you need 6 of these to swing to 1 hike. That seems unlikely”. I would agree here – I think the FOMC dots will give the market a reasonable amount to worry about. I think the market is complacent on Fed pricing for this year with Dec Fed Fund future meandering back and forth around the 35bps mark. If the FOMC median for 2015 is close to 0.625 and the weighted average around that level then you would likely see a stronger US$ out of the event. However, I also think the back end of the dot plots needs to be watched very closely. Median forecasts from the FOMC has 2 rate hikes in 2015, 5 rate hikes in 2016 and another 5 rate hikes in 2017. It’s hard to see the dot plots maintaining such an aggressive bias towards higher rates in 2016. So there is probably some bitter/ sweet here – the market is forced to price in higher risks this year while the Fed removes some rate hikes from next year/ beyond. That should be US$ positive in my view, but it certainly allows for a decent amount of volatility tomorrow morning.
So any last thoughts ahead of the FOMC? Rich made a couple of good points earlier this morning. “With 7 of 17 members at 0.625% (i.e. 2 hikes) you need 6 of these to swing to 1 hike. That seems unlikely”. I would agree here – I think the FOMC dots will give the market a reasonable amount to worry about. I think the market is complacent on Fed pricing for this year with Dec Fed Fund future meandering back and forth around the 35bps mark. If the FOMC median for 2015 is close to 0.625 and the weighted average around that level then you would likely see a stronger US$ out of the event. However, I also think the back end of the dot plots needs to be watched very closely. Median forecasts from the FOMC has 2 rate hikes in 2015, 5 rate hikes in 2016 and another 5 rate hikes in 2017. It’s hard to see the dot plots maintaining such an aggressive bias towards higher rates in 2016. So there is probably some bitter/ sweet here – the market is forced to price in higher risks this year while the Fed removes some rate hikes from next year/ beyond. That should be US$ positive in my view, but it certainly allows for a decent amount of volatility tomorrow morning.
Greece remains a source of volatility, but it feels well contained. V2X i.e. European equity vol is up at 29% however US equity vol closed below 15%. So the equity market is assuming the looming Greek default is well contained. Same in bond markets. 10yr Portugal hit a high of 3.39% last night though it closed inside that. Meanwhile 10yr Germany closed below 80bps. So peripheral spreads continue to push wider, but momentum is modest. So yet again, markets seem to be assuming that even if a credit event is triggered (note I argued yesterday that it may not be for many many weeks) the impact will be limited. Meanwhile EUR remains conflicted between better domestic data (though last night’s ZEW was soft) and the potential implications of Greece. As Rich noted yesterday, we remain of the view that the EUR is under-pricing sovereign risks again. Let’s see what it looks like post the FOMC.
What does all the above mean for the AUD? Well it’s more of the same until 4am tomorrow morning our time then markets will go into frenzy. I did point out (yet again) that rebar prices and iron ore prices continue to diverge strongly here. Chinese rebar price are down 9% since the beginning of May; iron ore prices are up 12%. Something doesn’t add up here! Once this current squeeze winds up, I see iron ore pushing back lower again. Our traders did note earlier in the week that the push above ¥450 for Dalian iron ore did feel like a massive short cover. Since last Thursday’s high, Dalian futures are down 7.3%. So it does feel as if that was a final climax of buying. I still see lower iron ore/ lower commodity prices as an argument for lower AUD through Q3. But at least for the What does all the above mean for the AUD? Well it’s more of the same until 4am tomorrow morning our time then markets will go into frenzy. I did point out (yet again) that rebar prices and iron ore prices continue to diverge strongly here. Chinese rebar price are down 9% since the beginning of May; iron ore prices are up 12%. Something doesn’t add up here! Once this current squeeze winds up, I see iron ore pushing back lower again. Our traders did note earlier in the week that the push above ¥450 for Dalian iron ore did feel like a massive short cover. Since last Thursday’s high, Dalian futures are down 7.3%. So it does feel as if that was a final climax of buying. I still see lower iron ore/ lower commodity prices as an argument for lower AUD through Q3. But at least for the moment, it’s more of the same here. Look to sell AUD on strength to 0.7800 with a stop up at 0.7835 and a take profit at 0.7705. Also look to sell AUD on stop below 0.7650 with a stop on this at 0.7690.moment, it’s more of the same here. Look to sell AUD on strength to 0.7800 with a stop up at 0.7835 and a take profit at 0.7705. Also look to sell AUD on stop below 0.7650 with a stop on this at 0.7690.