Australian Dollar Continues Lower
Most currencies were driven by economic data yesterday. The Dollar Index drifted slightly higher off the decent June ISM manufacturing PMI (up +0.06%) while the euro was slightly weaker (down -0.12%) after mixed manufacturing PMIs (they generally met expectations but the euro has seen a big rally lately).
The Aussie was the best performer vs. the dollar, rising +0.8%, breaking decisively through resistance at $0.94 and hitting a new high for the year. The strength in the Aussie was due to short-covering as the currency rallied through $0.94 (which had been the high for the year) thanks to the improvement in Chinese PMIs and the lack of any dovish comments from the RBA during their rate meeting yesterday.
Markets were looking for the RBA to make some mention of the recent strength in the Aussie and attempt to “talk it down” as they did last year, but that didn’t happen. It’s especially surprising given the fact that some bulk commodity prices (specifically iron ore) have collapsed 30% since April while the Aussie has rallied, causing a “double whammy” on the mining sector that continues to threaten the economy. But, the RBA refrained from any Aussie-related commentary and instead said they continue to expect a “period of stability” in interest rates (meaning no more cuts).
Given the divergence in the Aussie vs. key commodity prices (high vs. low), a stabilizing but not accelerating Chinese economy, and the RBA’s reluctance to ease further, the picture isn’t very optimistic for the Aussie economy. Fundamentally, things are still bearish for the Aussie. But, clearly the trend is higher for now, and next resistance is $0.9518. And, until the RBA says something about the elevated Aussie, then this counter-trend rally will continue.
The pound continued its grind higher, hitting another multi-year high after the Great Britain June PMI beat estimates (57.5) Tuesday, and the trend remains clearly higher. (As long as the Fed is dovish and the UK economy continues to surge, the pound will continue to rally vs. the dollar. We’ve not seen the highs yet in this trade, I believe.)
The yen weakened a bit vs. the dollar yesterday (down -0.25%), but it bounced off the intraday lows and dollar/yen remains below the 200-day moving average – and it needs to get back above that support level today or tomorrow; otherwise the outlook for the yen will continue to get stronger.
Economic data lately out of Japan has been a bit tepid, and given the lack of specifics from Shinzo Abe’s “3rd Arrow,” it appears the market is starting to lose some confidence in the PM (that’s why the yen is rallying – it’s not because of economics per se). The Bank of Japan remains in the corner of the yen bears, and I believe they will act if the economy begins to falter – but that could be at a much lower level for dollar/yen.
Again this has been a trade that has worked for over 18 months, so I’m hesitant to abandon it now, but the dollar/yen needs to get back above the 200-day sooner than later.
Bonds were sharply weaker yesterday as the 30-year fell -0.65%, trading lower off of the global PMIs. This largely implied the global economic recovery is progressing (there was also a cautious article on junk bonds and credit spreads in the WSJ, although that didn’t really tell us anything new).
Bonds were weaker all day yesterday (the selling began overnight Tuesday once the Chinese PMIs hit), and the declines accelerated after the strong auto sales and ISM manufacturing PMI. The yield curve steepened yesterday as the “belly” of the curve declined only modestly (down -0.27%), helped by the Fed purchasing $2.9 billion worth of 7-year bonds.
Bonds gave back a lot of last week’s rally yesterday, but still remain firmly in a solid uptrend until the 30-year breaks 135’18-ish, the uptrend will continue.