Global Markets Overview - March 22, 2016

The Turnbull effect

Prime Minister Turnbull’s decision to load the chamber to pull trigger for a double dissolution election might be a politically interesting event, but from strategist point of view, it’s adding to the ‘Perfect Storm’ we see facing the AUD.

Bringing forward the May Budget to coincide with the May Reserve Bank of Australia (RBA) meeting has seen the interbank markets pricing a May rate cut at just 24.6%, down from 35% just before Turnbull’s announcement yesterday.

With the May Budget taking the May RBA meeting out of the equation, we look to June and December meetings, which was when the market was pricing in the strongest chance of a rate cut.

June has moved from a chance of 57.6% a month ago to 33% at the close of business yesterday. December has moved from 77.9% a month ago to 62% now. Now time value is also in play for the December price, meaning the likelihood of a cut is actually under 50% for most of 2016.

AUD/USD retested 76c in the US session, hitting 76.2c as expectations of a rate cut in Australia are slashed.

Expectations of a rate cut were one of the only headwinds to be suppressing the AUD in 2016. With the election now putting the RBA slightly to one side, the AUD is likely to move higher still. With the Fed stepping back from rate hikes and Europe and Japan holding the line on negative rates, it will be with a broad brush that the AUD moves positively against.

AUD’s ‘Perfect Storm’ rationale

o Australian bond yields that are more than 250 basis points above rates in Europe, Japan and North America are a clear carry trade opportunity. The risk to the trade is back stopped by:

• A sovereign nation with a AAA credit rating
• A federal budget in better shape than forecasted (bond buying may ramp up after the May Budget)
• Country GDP growth at the top end of the developed world

o Commodities cycle forming a base, seeing upside pressure in AUD having being sold on expectations of a commodities collapse

o China’s ‘impossibility of failing’’ on its GDP reaching 6.5%. This will increase demand for industrial metals which puts further upside pressure on AUD

o The RBA unlikely to move rates in either direction in 2016

o (New point to the rationale) An Australian election and a May budget will keep the RBA out of the market until at least 5 July at best if it is to move

The RBA may want an AUD at the lower end of 70 cents, and some even want it at 65 cents. However, in the coming three to four months, it is hard to see the AUD finding anything other than support when it weakens slightly.

Asian markets opening call

Price at 8:00am AEDT

Change from the Offical market close

Percentage Change

Australia 200 cash (ASX 200)

5,190.40

24

0.46%

Japan 225 (Nikkei)

16,895.40

171

1.02%

Hong Kong HS 50 cash (Hang Seng)

20,801.70

118

0.57%

China H-shares cash

8,986.40

58

0.65%

Singapore Blue Chip cash (MSCI Singapore)

327.25

2

0.50%

Key inputs for the upcoming Australian trading session (Change are from 16:00 AEDT )

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

AUD/USD

$0.7581

-0.0005

-0.07%

USD/JPY

¥111.935

0.470

0.42%

Rio Tinto Plc (London)

£20.45

0.30

1.49%

BHP Billiton Plc (London)

£7.91

-0.40

-4.84%

BHP Billiton Ltd. ADR (US) (AUD)

$17.86

-0.31

-1.70%

Commonwealth Bank ADR (US) (AUD)

$77.40

0.26

0.33%

Metals Exchanges (Change are from 16:00 AEDT )

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

Gold (spot)

$1,243.75

-8.46

-0.68%

Brent Crude (May)

$41.46

0.55

1.33%

Aluminium (London)

1512.5

-7.00

-0.46%

Copper (London)

5048

0.00

0.00%

Nickel (London)

8750

95.00

1.10%

Zinc (London)

1864

18.50

1.00%

Iron Ore (62%Fe Qingdao)

$58.82

1.32

2.30%

IG Iron Ore (CNH)

¥434.25

-7.90

-1.79%

IG provides round-the-clock CFD trading on currencies, indices and commodities. The levels quoted in this email are the latest tradeable price for each market. The net change for each market is referenced from the corresponding tradeable level at yesterday’s close of the ASX. These levels are specifically tailored for the Australian trader and take into account the 24hr nature of global markets.

Please contact IG if you require market commentary or the latest dealing price.

EVAN LUCAS
Market Strategist

IG, Level 15, 55 Collins Street, Melbourne VIC 3000
D: +61398601748 | T: +61398601711
www.ig.com

IG Markets

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