Reserve Bank of Australia (RBA) governor Philip Lowe gave traders and economists something to focus on in Sydney overnight and the man driving the Reserve Bank gave a fairly upbeat assessment of the Aussie economy. Inflation is not expected to fall further, while growth is expected to remain around 3%, assisted by a falling headwind from the drop in mining investment. Dr Lowe also argued that growth of 3% is not thematic of an exchange rate that is “too high” and this is true when you plug the key variables into the RBA’s own ‘fair value’ model.
AUD/USD has traded in a range of $0.7664 to $0.7611 on the session, although the AUD has seen better days against the JPY and NZD, with AUD/JPY gaining 0.9%, helped by a pickup in positive risk sentiment. The good-will towards the AUD may come into play at 11:30 AEDT, with the RBA set to deliver its Statement on Monetary Policy (SoMP) and is expected take a clever to its growth estimates for end-2016 and mid-2017. Talk on the floors is that the RBA could cut as much as 1ppt off these estimates, with the revision lowered to a range of 1.5% to 2.5%. It seems likely that these figures are what AUD and rates traders will be keying off.
Keep an eye on China’s January trade data (no set time), with a view that the trade surplus should widen to $48.5 billion. The market usually never really understands how to interpret this data point, or at least if it really affects future growth reads, so I wouldn’t be expecting it to cause too much reaction in the markets.
On the equity front, we face a nice pop in Asian equities on open thanks largely to Mr Trump. The market has gotten fairly excited around commentary to U.S. airline CEO’s, such as:
We are going to be announcing something over the next two or three weeks that will be phenomenal in terms of tax ... we have obsolete airports and train systems and bad roads.
Trump’s spokesman Sean Spicer then pushed this notion on further saying Trump’s tax rollout is “comprehensive” and will “spur economic growth”. Mr Spicer also mentioned we should hear Trump’s budget in a few weeks, which is interesting as there had been some talk earlier in the week it may be pushed out until May.
The market loves the idea of tax reform, it has corporate tax cuts in its sights and if Trump can push that along, with a more simplified personal tax regime the U.S. and global equities will find buyers. Of course, we are still waiting for further colour on border tax too, and that is something economists really want to see to make the proposed cuts to corporate tax efficient. A 20% tax on U.S. imports will raise around $100 billion a year (0.5% of GDP) and this can effectively offset the potential cuts in corporate tax. Interestingly, there seems to be a growing headwind in the U.S. Senate for a border tax, notably on the view that it is too complicated and shuts down economic growth.
The comments from Trump has caused not just selling in the U.S. fixed income market, notably around the 5-7 year maturities, but we have seen new all-time highs in the S&P 500 and Dow Jones. The Russell 2000 has rallied 1.4%, and although this index is not yet hitting new all-time highs if you want to express a view on “Buy America” this is the weapon of choice given the companies in the index source a far greater percent of revenue from the U.S. than the S&P 500. U.S. banks have also been at the heart of the move higher today, and this may support Aussie banks on open.
We are calling the ASX 200 to open at 5690, which would put the gains for the week at 1.2%, which is certainly positive with the market looking like it could have seen a far deeper pullback earlier in the week. The bulls have really stepped in and defended lower levels and this shows no real concern around holding equity ahead of next week’s Aussie earnings, which roll in thick and fast. On the ADR front, we can see BHP (NYSE:BHP) is likely to open modestly higher +0.6%, CBA +0.5%, while WPL is eyeing a fairly flat start despite U.S. crude price having a better time and gaining 1.5% on the session. Bulk commodities are also supportive, with iron ore and steel futures putting on 1.9% and 0.7% respectively.
Watch Qantas (AX:QAN) on open given U.S. airline stocks have rallied strongly on Trump’s comments (to airline CEO’s) that “we want to take care of you”. U.S. airline stocks have naturally rallied strongly.
One other area to focus on, especially if you are more FX focused is the Japan/US or I should say Trump/Abe summit. Reports have suggested currency manipulation won’t be a key part of the agenda. Although after U.S. Treasury Secretary Steven Mnuchin’s recent suggestions that the Japanese were playing the money market and the devaluation game surely it has to come up when he meets with Japanese finance minister Taro Aso.
Who knows we may even hear of a great friendship and even early signs of an FTA! We may have to wait till the Abe/Trump presser which is scheduled for 05:00 AEDT on Saturday morning.