Our view is that recent highs in indices, ES, AUDUSD, AUDJPY are likely to remain in place as risk aversion sets in. The July 16 and 20 failures of AUDUSD at .8800 are marked as significant, in our view. We target AUDUSD .8500 and AUDJPY 73.00 near term, looking for lower levels in 3 months.
With AUD most vulnerable to move the most during bouts of risk aversion while the JPY is primary safe haven currency, the AUDJPY will fall most aggressively should equities weaken, as we expect. JPY has outperformed USD as JGB's rate advantage over US Treasuries sustains.
The RBA minutes and RBA Governor Stevens' speech helped boost AUD temporarily. But then the dollar clawed its way back largely due to stops and lower equities. The latest stress test results also tempered investor enthusiasm. Dow futures are about -82 and looking for a lower open of NY session following a mixed Asian session. Q2 earnings season picks up with over 20 S&P 500 constituents reporting, with several financial institutions in the mix. We get the latest housing starts and building permits data. The expiration of the homebuyer tax credit will likely result in mixed data at best. Sentiment will remain choppy ahead of stress test results but US data on expectations could help the dollar benefit on pullbacks in risk sentiment.
The minutes from the RBA's July 6 meeting were broadly in line with the policy statement released 2 weeks ago. The Board noted that, to settle markets, it would be "critical that the [European]stress tests be regarded as credible and that plans be in place to deal with any capital shortfall identified". For Australia specifically, it was noted that a "critical medium-term question was the extent to which economies in Asia could continue to grow strongly in the face of what could be an extended period of subdued conditions in the major North Atlantic economies." RBA Governor Stevens said the medium-term picture for Australia is fairly positive, which pushed AUD higher.
Bloomberg reported that stress tests results, due on Friday, would show that a German bank would fail the tests, citing unnamed people "familiar with the result." Even though it was reportedly only one German bank, the news was negative euro as it raised questions on the depth of the stress tests and the fact that the bank in question has government support, which means that investors are uncertain how banks will obtain more capital if needed.
Consensus expect another +25bp rate hike at 0900EST following the strong labour data release. As a 25bp rate hike is priced, if the BoC hikes, not much of a CAD reaction is likely. However, if the BoC does not hike that would be a surprise, negatively affecting CAD. There is the slight chance that policymakers may prefer to await the release of European stress test results, before committing to another dose of tightening. Ahead Thursday, the BoC will release a Monetary Policy Report in which it will update its economic forecasts.
Source: UBS, Bloomber, Chris Lori
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