Fundamental/News Thread

RBA out of the way:
Though we wait for Policy Statement on Friday, which could offer bigger clues on policy going forward and direction for the Aussie also.

RBNZ out of the way:
Big one for me!
Brought forward forecast timing for next rate.
Positive outlook on data.
Says dual mandate by new government won't make much of a difference to policy stance. This is hawkish.

What do you think, guys?

Great analysis. I think you are right, but I am still concerned by the new government in NZ. I am expecting a few early hiccups as this coalition tries to govern.

NZD has been losing against the USD, EUR, and GBP since early August. Was that statement strong enough to reverse the trend? I have my doubts. Rate hikes are still not expected until 2019.

Unfortunately, I don't see a great trade out their right now, with the possible exception of trying to trade USD into the rate hike in December. Let me know if I am missing something.

Depending on the Minutes, short AUDUSD could be a great trade if we get the right sentiment emerging from the Minutes.

Agree its all now depends on USD in NZD/USD pair, US tax bill will mean a lot not only for US but for the whole world, because a change in financing conditions in the US reverberate in other markets too.

.

The RBA has dialled back its inflation forecasts

The Reserve Bank of Australia (RBA) has just released its latest quarterly Statement on Monetary Policy (SoMP), including updated projections on GDP growth, inflation and unemployment over the next few years.
Here are the new forecasts.
https://edge.alluremedia.com.au/uplo...-somp-2017.jpgSource: RBA
And here are the bank’s forecasts from three months ago.
https://edge.alluremedia.com.au/uplo...-somp-2017.jpgSource: RBA
Today’s forecasts are the first time the RBA has forgone the use of ranges, opting instead to make its forecasts to the nearest quarter percentage point.
This was announced last month, and was widely expected by financial markets.
So how have they changed?
The most noticeable tweak involves the bank’s underlying inflation forecasts, those which are of most importance on the outlook for interest rates, with the bank now forecasting that it will move back to the bottom of its 2-3% target range by the middle of 2019.
Not in the target band, but at the bottom of the target band.
In its previous forecasts, the midpoint had underlying inflation hitting 2% by the end of 2018 before moving back to 2.5% during 2019.
Based on these forecasts, the bank now thinks it will take longer for inflationary pressures to build.
That has implications on the outlook for interest rates, suggesting it could take longer for the RBA to begin normalising policy.
The bank’s headline inflation forecasts have also been lowered from those previously offered in August.
Outside of inflation, the board also tweaked its unemployment forecasts for the end of 2019. It now sees Australia’s unemployment rate sitting at 5.25% in two years time, below the 5.5% midpoint level offered in its previous forecasts.
Although an upgrade, the outcome suggests wage pressures over the next couple of years — a key factor on the outlook for inflationary pressures — will remain weak.
“There is uncertainty about how much wage growth will pick up in response to improved labour market conditions and the associated reduction in spare capacity,” the bank says.
“More firms have been indicating that they are finding it difficult to find suitable labour, which might lead to wage growth picking up more quickly than anticipated.
“On the other hand, the experience of low wage growth in many countries with tighter labour markets suggests that structural factors such as technological change and globalisation have had an important bearing on wage outcomes and could continue to do so for some time yet.”
Australia’s full employment rate, or NAIRU, is seen by many analysts to currently sit at or just below 5%. An unemployment rate forecast of 5.25% by the end of 2019 implies that despite a high degree of uncertainty, wage pressures are likely to remain benign.
Again, along with the downgrade to its inflation forecasts, this argues against the need for a near-term lift in interest rates.
On the outlook for economic growth, the bank’s new GDP forecasts were much the same as those offered in August.
It now sees GDP growth at 2.75% by the end of June next year, down fractionally on the 3% midpoint it offered in its previous forecasts. It also made a small reduction in its forecast for the end of 2019, trimming it by 25 basis points to 3.25%.
Outside of those tweaks, its forecasts were unchanged.
Making the downgrades to its inflation forecasts even more significant, it came despite the bank making significant changes to its Australian dollar and Brent crude forecasts.
Over the forecast period, it sees the AUD/USD and AUD trade-weighted index (TWI) at 77 cents and 65 respectively, down from 80 cents at 67 in August.
It also made a significant upgrade to its Brent forecast, seeing it average at $63 per barrel, up from $53 per barrel three months ago.
Those assumptions should help to boost inflationary pressures. However, even with those tailwinds, the bank still sees inflation lifting at an even slower pace than before.
These forecasts also use current market pricing for interest rates, another significant development.
Markets don’t have a full 25 basis point rate hike priced until early 2019. So if rates were to increase by then, and the RBA’s forecasts and assumptions are correct, it still only sees underlying inflation at 2%.
All up, it suggests the RBA is still a long way from lifting interest rates, as pointed out by Robert Rennie, Global Head of Strategy at Westpac, on Twitter.

Fader,

Which trades did you take this week? Just trying to get a sense of what you were thinking about.

I stayed on the sidelines.

I might have missed two trades though: 1) I fell asleep before the RBA rate decision; 2) After the Democratic Party landslide on Tuesday night, if I played out the implications for the market, I might have suspected that it was going to cause the Republicans to re-think the release of their tax plan on Thursday. Doesn't look like it was a great trade, but I didn't even consider it as a possible trading opportunity until Thursday night.

UOB Research maintains a bullish outlook on AUD/USD mainly on the ground of expecting further recovery in the commodity prices space.
"Currently, we have a positive view in industrial metals complex, led by Copper and positive view in the energy complex, led by Brent crude oil...
Given that Australia is a key industrial and bulk commodities exporter, the AUD/USD will eventually benefit from the recent recovery in the commodities space.
Hence, going forward, with the RBA widely expected to stay on hold, the on-going recovery in commodity prices will take over as the key driver for AUD/USD," UOB argues.
"As such, we maintain our positive outlook for AUD/USD, driven mainly by expectations of further strength in key commodities prices. " UOB concludes.
UOB current forecast for AUD/USD is 0.81 for 4Q17.

Everyone misses trades. The thing is your focussing on the right stuff. We just have to wait for the opportunities.

At the moment I am really busy -and being busy means you don't get into psync with the market, because your mind is focussed on other things.

I went long on the NZDJPY before the announcement.
The reason was that the Kiwi is too low and the Labour government have introduced inflationary policies. So the RBNZ could only have been more hawkish.
However, sentiment at the moment is bearish.
This is because of a few things. Trump in China, this tax issue in the US. Also I did note that GDP forecasts were trimmed despite Spencer's view that the economy it's goimg to do well. On the chart price rallied to resistance and then pulled back.
Knowing where orders and volume are is really important.

Looking at the business Trump won does not seem to be much. There is a lot of bullish sentiment on the pound at the moment. I did go long on the pound earlier in the week, but I much prefer to get a large move in single day rather than having funds exposed for a long period of time -that worries me.
Although the resignation of Patel on reflection was perhaps a buying opportunity.

I should have gone long on the euraud.

The Euro can act as a safe haven. And with the NZD, AUD and dollar experiencing some poor sentiment obviously the yen and the euro were beneficiaries

Week Ahead Data and Policy
There seems to be a broad consensus on the trajectory of policy in the remaining weeks of the year. Barring a major shock or surprise the Federal Reserve will hike rates next month. The ECB's course is set until at least the middle of next year when the current policy will begin to be debated in earnest.

The BOJ's Kuroda has made it clear that the BOJ will continue to pursue Quantitative and Qualitative Easing (QQE) and Interest Rate Targeting as the inflation target continues to be pushed out in time. The Bank of England and the Bank of Canada previously raised interest rates but left little doubt in investors' minds that there is no urgency to do so again in the coming months.

US interest rates (five years and beyond) bottomed on September 8. The 10-year yield is up 40 basis points since then, as is the 2-year yield. The rise in US yields completely accounts for the 37 bp increase in the two-year premium over Germany, which we find, despite the talk of new divergence, a good guide to the euro-dollar exchange rate. The US 10-year premium over Japan has widened nearly 35 bp over the same period.

The dollar bottomed against the euro, yen, Swiss franc and Canadian dollar on September 8 as well. Sterling is a notable exception. It bottomed at the start of the year. The Australian dollar's low for the year, like sterling, was also set at the very start of the year. The New Zealand dollar by contrast, recorded its low in May and recently retested the level as investors (over?) reacted the change in the New Zealand government and policies, including changing the central bank's remit.

The economic data scheduled for release in the coming days are unlikely to have policy implications. Or, to the extent that the data impacts expectations, it may simply reinforce existing views.

The US data is likely to show an economy recovering from the impact of the storms, and the stability of price pressures somewhat above the troughs seen earlier this year. Both the St. Louis and NY Fed GDP trackers are estimating growth in Q4 at a little more than 3%. While the quarter is nearly half over, and there is much data still to come, the take away is this appears another quarter of above-trend growth.

Headline October CPI may ease on softer gas prices, but the core rate is likely stable at 1.7% for the sixth consecutive month. Frankly, given the base effect, it may be difficult the year-over-year measure to head much higher over the next three months. Headline retail sales soared 1.6% in September as nature (storms), and rising prices conspired to flatter the data. However, a flattish report should be surprising in October. On the other hand, the GDP measure is expected to be a solid 0.3% after a 0.4% rise in September. Industrial output is expected to rise 0.5%, lead by a similar rise in manufacturing.

The UK reports inflation, employment and retail sales in the week ahead. Consumer prices may not have peaked yet in the UK, but they seem close. The quarterly inflation report released earlier this month suggested inflation will move above 3% in October and this will ostensibly lead to a letter from Carney to Hammond to explain. Yet, with a little luck, inflation would have already begun easing by the time the letter must be delivered.

Although the UK enjoys what economists consider full employment, wage growth has failed to keep pace with inflation. Earnings are reported with an extra month lag from the employment data. Earnings growth, excluding bonuses, rose 2.4% in the three months (annualized) in September 2016, and is expected to have risen 2.2% in the three months (annualized) through September 2017. Meanwhile, consumer prices (CPIH) has risen from 1.3% in the year through September 2016 to 2.8% through September 2018.

UK retail sales are expected to have stabilized after sharp falls in September. Excluding auto fuel, retail sales may be flat after a 0.7% decline in September. The year-over-year pace is likely to post its first contraction in 4 1/2 years. It may prove temporary as the base effect will be favorable over the next couple of months. However, the squeeze on household finances may not improve much until the spring.

For the eurozone, investors will get more details about data that have already been reported, like the estimate for Q3 GDP and the flash CPI. The September industrial production data that are new are embedded in the GDP figures. The take away is that the eurozone economy continues to operate a strong pace. The unexpected drop in the core CPI (from 1.1% to 0.9%) may be explained by quirks that do not reflect the general price level, like holiday packages, and some administered prices.

Japan reports its first estimate of Q3 GDP. After a robust Q2 (2.5% annualized) the Japanese economy appears to have slowed considerably. However, the 1.5% median forecast in the Bloomberg survey would still be well above trend growth. The risk may be on the downside, with consumption and housing being a drag, partly blunted by export growth. Of note, the GDP deflator may turn positive, albeit barely, for the first time since Q2 2016.

There are three political issues, which will likely shape the investment climate. The most important is US tax reform. Optimists still think a vote by both houses can be held by the middle of next month, ahead of the winter recess. We are skeptical, and the point we have made that is worth repeating is that, like health care reform, the key debate is not between the two main parties, but within the Republican Party.

Despite months of leaders of both houses working with the Trump Administration, the bills are dramatically different on several key issues and note that the scoring still places the evolving House version more than the agreed-upon $1.5 trillion addition deficit over the next ten years. There are also conflicting incentives for House Republicans, who will face voters next year, that herald from states that Trump lost in 2016. It appears that prospects of fiscal reform a remote.

In Europe, the negotiations over the UK's exit from the EU continue to be an important talking point. New wrinkles appear to have emerged, including the Irish border, that seems as intractable as any challenge of the divorce/amputation. There is speculation that Prime Minister May will shortly make a more detailed commitment of the sums the UK will pay to fulfill its obligations. This is in the hope that next month, the negotiations can turn to the post-separation relationship. It is by no means a done deal, and there is a certain pessimism that seems to be growing.

Lastly, we note the apparent progress in the formation of the next German government. It appears that the Merkel may soon concede the coveted finance ministry portfolio to its new coalition partner (likely the FDP). However, Merkel may strip the international (e.g., Europe) responsibilities from it and transfer them to the Economic Ministry. The Finance Minister's remit would cover the domestic economy. The Economic Minister would attend the Eurogroup and G7 meetings, for example. Such considerations may be important as investors attempt to assess the policy implications of the new coalition government.

Source:marctomarket

That looks like a good trade.

I am still getting used to the idea that the euro can be a safe haven...It is amazing how much things can changed.

Thanks for this Lordbengs

Looking at the pound;

Geo-politically - its not good at the moment, with some 40 MPs prepared to sign a no confidence vote in the PM
Brexit wise- this is not good
http://uk.reuters.com/article/uk-bri...-idUKKBN1DC0KL

Risk event wise for this week
Estimates for CPI is higher than last month (Tuesday)
Average earnings are forecast to dip over the previous month (Wednesday)
4 members of the BOE speak on Thursday - this will important in light of the releases earlier in the week.

The BOE expect inflation to peak at over 3% for October.
Obviously the rise in oil prices will have an effect.

Hello, I am a long time trader, haven't posted for a while. Been having success trading with the fundamentals so I'm in here. Looking forward to following along, hopefully I can contribute something worthwhile, thanks to all for your input here.

Welcome Richard

Look forward to your posts

Right EURAUD flew last week.

Lots of reasons.

Germany's GDP
Draghi's recent speech did nothing to quell the march of the Euro

RBA have lowered CPI forecasts
Their statement seemed downbeat to me. The tone of a statement is really important.
Iron ore is in for a tough time between now and February.
China's growth or industrial production has lowered
Also I did see that the Nomura reckon that there has been real selling flows on AUDJPY
Also unread somewhere that investors are now looking for more exotic destinations for their cash
With the US in hiking mode this won't help either the Aussie or the Kiwi.

Lowe and Draghi speak this week. Perhaps Draghi might realise that he needs to say something more forthright to address this rally.

Keep an eye out for any news on NAFTA. I don't think it will turn sour if it does the CAD is in some big trouble

A couple of things that concern me

a) The EURJPY- is off. Think that this was really Aussie weakness rather rather than EUR strength towards the later part of last week

b) Technically the EURUSD looks as though its going to fall- (note to self stopping looking at the charts)

Think that this is the reason

http://www.forexlive.com/news/!/fdp-...talks-20171119

Given Trump's rhetoric, it is just a matter of time.

I must admit that I have been out of sync with the market for the past two weeks. I haven't been able to grasp sentiment for anything.

Fader, do you have a good sense about how bond yield curves impact the market?

I read this on Mark Chandler's blog, but I need to figure out how to read the bond market and structure forex trades.

Marc Chandler: "In the currency market, on a purely directional basis, the yen is the most sensitive to US 10-year yields (past 60-day correlation 0.94). The Swiss franc (0.86) is followed by the Australian dollar (0.81) and the Norwegian krone (0.80). The correlation between the 10-year yield and euro (and Swedish krona) lag behind but is still robust at 0.76, while the Canadian dollar's correlation is a touch lower at 0.74. Sterling is the outlier with a correlation of 0.18 over the past 60 sessions."

Any thoughts?

Hi Cheetah

I don't - but there is a chap here who does

https://www.forexfactory.com/showthr...ighlight=bonds

I guess its a similar sort of vein - we are always looking for major geopolitical or economic events.

Regards

F

Think I should clarify if any central bank is going to adjust their QE program of course i would be over it like a rash