No inflation in NZ, at least for now, as the credit cycle slows. Expect NZD to continue to underperform, especially v AUD.

NEED TO KNOW

FX markets: USD still weak, weighed by position unwind, politics and reduced Fed hiking expectations.
Other markets: equities in those economies hiking or with strong FX rates struggling.
Policy: AU - despite further natural real rate discussions, the RBA is more optimistic on the AU economy, supporting yields and the AUD (Macro theme – the RBA appears less worried about weak consumption and housing than we are. Jobs and business positives are moving them to a more positive bias. That has yield and FX supportive tendencies, along with a weak USD and higher global yields).

SUGGESTED POSITIONS

New trades: buy AUG VIX at 11.3% target 15%.
FX: suggested positions – Short EMFX CEW at 18.6 risk 19 target 17. Short NZDCAD at .9650 risk .9760 target .91. Short NZDGBP at .5635 risk .5750 target .53. Long AUDNZD at 1.0630 risk 1.0490 target 1.10.
Bonds: short Semis long CGBs (eq weighted basket of 3/5/10yr WATC, QTC, NSWTC, TCV) at 30.8bps Feb ‘15. Short ASX Banks 5yr CDS at 68bps target 140. Short UK 2yr yields at 0.29% risk 0.1% target 0.90%. Short NZ 10s at 2.845% risk 2.7% target 3.75%. Short US 10’s at 2.26% risk 2.17% target 2.4%+.
Equities: long ASX All Ordinaries Top 100, Sell ASX Small Ordinaries at 0.81x ratio. Bought 23 Nov RIO 59 put sold 66 call for $1.35 cost. Buy CAC sell DAX at 2.42x ratio. Buy AUG VIX at 11.3% target 15%.
Commodities: short Gold long Silver at 76.9 risk 85. Long Gold at 1227 risk 1210

FX Markets: USD still weak, weighed by position unwind, politics and reduced Fed hiking expectations

EUR

LT 1.6050 peak, for 1.00/.8228. MT 1.40 peak, range 1.04-1.17 holding, favour a decline to 1.00 then .90, now within the top of 2yr range at 1.15-1.17, be wary of reversal from 1.17, wait for a reversal before selling, and careful holding longs at 1.17.

GBP

LT 1.34/1.74 range breaking, target 1.05. MT target at 1.34 met, now downside risk to 1.15/1.05 exists. ST 1.20/1.31 range breaking, next leg still to 1.33/1.35 while 1.26 supports. Still underway despite pause. EURGBP back thru the highs again, back to neutral.

JPY

LT base at 75-76, peaked at 125.85, MT targets at 90-100 met, now back to 125-130. ST targets are 120-125 again. Range 119/108.20, failed at top of 114.50-109 range, wait for lower levels to re-buy.

AUD

LT peak 1.1085 with Fib retracement targets at .72/.60/.50. MT range .71/.78 broken, counter to our expectation. While .7750/.77 holds, should now see range breakout to .82/.84. Do see this as a short term upside break that will fail, and thereafter spot declines back into the .78-.71 range again. For now though don’t fight the breakout. Stay long AUDNZD.

NZD

LT peak .8850 downside target .60/.50 again. MT .62/.7450 range intact, just, but topside being retested yet again. Sense will find upside tougher due to extended long positions. Still failing/trying in .7350/.7450 zone for now. Maximum topside on any break of .7450 would be .77/.78 and then it should peak and head back into the range sub .7450 again anyway, but for now expect range and a test of .72 thereafter.

CAD

LT .90 base for 1.60. MT peak at 1.4580, range 1.25/1.3780, expect a decline to 1.25/1.17. Stay long CAD, add to longs after any 2-3 cent bounce.

EUR,GBP v AUD, NZD, CAD

LT/MT trend change underway. AUDEUR .61/.73 range, down now sub .65. AUDGBP prob down to .56 again after key reversal day down o/n. Stay short NZDGBP at .5635 risk .5750 targ

Other Markets: Equities in those economies hiking or with strong FX rates struggling

S&P: LT targets for major peak 2500, 2750 at a stretch. MT peak delayed, edging towards new highs now near 2475-2550 so still expect a bigger pause to unfold soon. Buy VIX today.

Gold & Silver: LT 2500-3500 target, 1050 an important low for a recovery to 1930 again. ST peak 1375, and base at 1140/1050, stay long at 1220 risk 1205. Silver: LT 50+ target. ST and MT low at 13.65, peaked at 21/18.50, basing again, watch for upside.

WTI: LT peak 115, and Brent 118. MT lows at 26 in place, think this MT correction rises to 60-65 then we see new lows sub 26. ST 55 peak and 42 the low. Probably based at 44 above the low, still awaiting a pullback to buy, but more bullish now.

Copper: LT 4.55 peaked for $1.25, MT low at 1.90 but still eventually favour a new low. ST 2.80- 2.50 range, neutral.

Bonds: US Bonds have changed trend, from easy money and low growth and inflation to higher growth, inflation and tight money. US 10yr yields can continue to rise towards 3-3.5% on that basis, and in 2017 FedFunds should hit 1.375%. If inflation gets out of control FedFunds will be higher in 2018. AU & NZ should narrow to US yields, as should EU bonds. While the seasonal US data cycle has peaked in March and may decline into Nov, the US ESI has also based. Expectations are too low. This should keep yields in a range for Q2 2.0-2.6% in US 10’s and 1.4-1.1% in US 2’s. Be agnostic on positions and trade extremes of longs and shorts. Looking to sell short ends and play US v AU, NZ, EU bond narrowers. The big change in recent weeks has been BOC/ECB/BOE hiking intent though. This will elevate all bond yields globally. Bias to be short UK and NZ bonds, the former to capture hikes, the latter in case the RBNZ and/or RBA hike. US 10’s at 2.25% in the sell zone, do so.

Shanghai: LT range down to 1750. MT peak at 5200, still downside extension targets to 2200-1750. Lows at 2650 and range highs at 3300 have so far capped. Failed badly at 3220 but now regained. Reduced leverage, policy tightening globally that dampens domestic growth and abating capital flows are headwinds. Neutral.

ASX200: MT/LT peak at 6000, target decline to range lows at 3150. MT range 4800-5950, failed at 5950/6000, met 5650 target, now expect 5850/5900 then another failure.

TODAY'S THEMES

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The two points made brings us back to home shores and whether the RBA is actually trying to signal that rates will rise, stay neutral, or fall from here.
We can’t find anything in the reading of the economic tea leaves or in their public statements to suggest that they think rates will fall.
Their recent comments on the economy have been remarkably more sanguine about housing, and retail and wages they tend to think are basing out, so they’ve shifted to focussing on upside rather than downside risks.
This implies higher AU yields and AUD simply by itself. However our point in recent weeks, even before last week’s RBA minutes discussion around the natural real rate of interest, has been that in a global environment of rising yields, AU yields and the AUD would likely rise anyway.
Both factors – more focus on macro strength and global yields rising – tend to lean that way, regardless of whether the RBA expresses a specific tightening bias at this stage or not (and they have not as yet anyway).
The RBA DepGov DeBelle outlined that in his speech Friday, stating that the AU natural real interest rate discussion was not meant to imply any signalling on rates, just that it was just like any discussion that the Board will periodically have on certain topics.
DeBelle also stated that, global factors (which he spent some time discussing) were of course one factor that the RBA took into account when setting rates, but that it was simply one factor along with domestic conditions, that influences policy, and that therefore the fact that other global central banks were hiking should not necessarily mean the RBA will too (our implication).
Of course, he is correct in saying so. However our point here has always been that a) global central banks always tend to move rates based on domestic considerations, but that b) in a globally interconnected world, and with the post GFC growth cycle so long in the tooth, most nations are now coming up against similar domestic problems (falling unemployment, continued growth, concern that inflation will lift further), and that negative real interest rates are inappropriate in that environment.
Even if they do not intend to move as a block, the reality is that global central banks do, as they faced with the same issues, even if with delays (18mths normally from the Fed).
That is exactly where the RBA is now at, and while unemployment is not back at cyclical lows near 4% like in 2007, its falling and the RBA expect it to fall further, it thinks GDP growth will be around trend near 3% going forward, and that inflation will track back to above 2% going forward.
In that environment, and with inflation and GDP weakness seen by the RBA as temporary and rebounding moving forward, the RBA is faced with a set of circumstances similar to global central banks, even if the need to hike rates is not quite so urgent given that those other nations already have rates significantly below RBA levels, and thus the degree of negative interest rates is more significant in those countries than it is in AU.
The scenario for AU financial markets is that, given these settings and views on the AU macro economy, the RBA is certainly not dovish and focussed on downside risks looking forward, but neutral thinking of upside risks instead.
They have stopped short of a hawkish bias, at least for now, in their minutes, but that is the way they are tending to lean, even despite what we see as significant housing and retail/consumer risks for the domestic economy looking forward, and especially if yields rise.
If they do adopt a hawkish tone in coming meetings if the AU economy improves like they expect, then the natural real rate discussion they are using to likely frame where official cash rates would need to get back to, simply to keep the AU economy stable, ie. around 3.5%. Importantly therefore, a neutral but upside risk focussed RBA implies rising AU yields and the AUD, and this is only exacerbated by global trends towards rising bond yields.
This should imply headwinds for stocks (so, more ups and downs rather than simply sustained gains) in those nations where yields are rising (the most). Importantly also, only a change in US yields and the USD trend would alter the recent gains in the AUD, and move that trend back to sideways or down.
We need to watch for that post FOMC this week, and indeed, AUD may now move sideways between .80/.78 for a week after such a sustained 2 week rise. But it won’t move due to the RBA scotching bond market expectations to price in hikes, as a neutral with upside risk stance by the RBA implies higher not lower AU yields from here on in. AUD will only move back down if the USD reverses course, and does so in a persistent manner. So this week’s FOMC is key in determining that.
Finally and relatedly, as we head into the FOMC this week, with markets having completely unwound their USD longs and thinking dovishly about Fed inflation expectations and their influences on policy, we can’t but think that any turn higher in the USD would (as outlined above) translate into even a mild US stocks retracement.
Our sense remains that the Fed think growth looks ok, that inflation’s dip is temporary and will head back to 2% or above, and that therefore “contract (balance sheet) and tighten (in Dec)” looks the right stance for the next 6mths by the Fed.
With not even 10bps priced for Dec, a reminder that a hike is priced still would likely see US yields rise and the USD rebound from lower levels ideally around 92. That would cap stocks, even if for a modest corrective phase, and the VIX last night traded 9.3%. Rarely have you (or we) lost money on a 1mth or 2mth horizon being long the VIX under 10%.
We will suggest buying it today (or the August contract at 11.3% anyway) just to see where it goes to in coming weeks.

We will leave it at that to start out the week, and catch you all tomorrow!

Craig

Craig Ferguson - Director of Strategy
m +61 422 907 465
e craig@antipodeancapital.com.au

Need assistance? Please feel welcome to contact Craig Ferguson directly or submit and online enquiry.

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Katie Gold27 July 2017