It promises to be a fairly important day for the Aussie rates and FX markets, but if we look at the options market and AUD/USD overnight implied volatility, at 15.91% it’s in no way elevated. In other words options traders are betting that despite today’s Q3 inflation print (due at 11:30 aedt) potentially closing the door to a rate cut this year, AUD/USD is unlikely to undergo any big price moves today. The market is so calm and really feels the prospect of a core (or trimmed mean) inflation print so low (say +0.2% qoq or below) that it shifts the RBA’s thinking on rate cuts, is simply a very low probability.
With the speculative FX community quite long of AUD’s there are real risks of sizeable downside in AUD should we get a quarterly print of +0.2% or lower, with the markets implied 14% probability of a November rate likely increasing to around 40%. However, as suggested this seems unlikely. A number above +0.7% qoq or above and the discussion in some circles may even change to one of ‘has inflation fully stabilised and should we be talking about rate hikes in late 2017, early 2018?’ It’s no surprise then that the AUD was the superstar performer overnight, rallying against all G10 currencies, notably against the CAD, which has taken a hit as US crude has closed below $50. A level I have been saying looks quite important for the barrel and has been key support since mid-October.
The commodity story is one that is front and centre in Australia and the doomsday spruikers are shaking their heads in disbelief. Perhaps they can also focus on the property auctions in Sydney and Melbourne last weekend too. Coking Coal has been going nuts since the beginning of the year, this is not a new story. However, Iron ore and steel futures are now the hot topic, especially after iron ore futures rallied by its daily limit of 6% yesterday. Last night we saw copper rally 2.2%, one of the biggest moves in a while, so that can go on the radar too and given the momentum/trend mentality of the Chinese mainland trader if this rally has further legs we’ll soon see traders branching into other markets like Dalian egg futures! Overnight though, we saw some of the heat come out of the move with iron ore futures up a mere 0.8%, while small loses have been seen in steel (-0.8%) and coking coal futures (0.2%).
Gold has seen some better buying and has reclaimed its longer-term 200-day moving average at $1270, despite the market increasing its implied probability of a December rate hike (from the Federal Reserve) to 72.5%. What seems more important to me is the pace of hikes in 2017 and if the Chinese decide to start buying more gold as a result of sustained CNY weakness. Looking into market pricing in the fed funds futures we can see the implied probability of just one hike in 2017 fell overnight from 80% to 78%, which seem supportive of gold. Technically a break of $1280 (the 38.2% retracement of the September to October sell-off) would open up a move into $1290-$1300.
BHP's (NYSE:BHP) adr (by way of a proxy for the mining space) is up 15c, but the traders are preferring to play likes of FMG and AWC, which look like a momentum and trend traders dream. Both look so bullish on any time frame.
The broader market should see modest losses on open, with financials likely to see a flat open. The financial sector contributed 14 points to yesterday’s index gain and it hardly shows fear about the upcoming 2H16 earnings season. It will certainly be interesting to see how banks and REITS perform on the Q3 CPI print as there is such a fine balance between a further fall in the cash rate and the implications on margin, while if inflation runs too hot, what will the implications of mean to housing and the future supply of credit. The banks will clearly dictate the performance of the broader market today, so in banks we trust.
Apple's (NASDAQ:AAPL) number after-market look quite uninspiring and we are seeing shares down 2.5% in after-hours trade. They may have beaten EPS expectations by 1c, but we can see Q1 gross margins estimates of 38%-38.5% that are slightly below expectations, as is the Q4 average selling price at $618, and Q4 sales of $46.9 billion vs estimates of $47.0 billion. IPhone sales look pretty good though at 45.5 million.