RBA Rate Decision Talking Points::
- The Australian Dollar has exhibited little exceptional volatility and no commitment to trends
- A lack of movement is remarkable for AUD considering the wave of fundamental event risk recently that has undermined confidence
- Working out the Aussie Dollar's bearing is establishing what theme is most 'important' and then assessing expectation vs realization
The Australian Dollar Has Gone Nowhere
When we consider the restricted momentum behind global equities or the unexpected lift from the Dollar following the FOMC's admission of a more dovish course setting with its policy, it comes as little surprise that the Australian currency is generally unresponsive to its own fundamental motivations. Yet, the absolute lack of volatility from the Aussie Dollar is still striking. There are few themes competing for the currency's attention - or it may be argued are completely lacking for sway over it at present. Interest rate expectations deflated a long time ago but the US Dollar's usurping the carry currencies' throne is more recent. One way or the other, the domestic and external considerations for monetary policy have done little for AUDUSD price action. Trade wars are another systemic theme that has garnered greater influence of late thanks to the downturn in China's economic health. Australia has managed to avoid a recession for decades thanks in large part to its direct trade relations to China - which imports much of the island continent's commodity exports. That connection works both ways however and the recent downshift does not bode well. And then there is the traditional data that reflects upon Australia's health. Thus far this week, we have seen the TD Securities inflation figure reading drop from a 1.9 to 1.5 percent pace, building permits sharply a second month (by 8.4 percent) and service sector activity tumbled into contractionary territory with a 44.3 reading (anything below 50 shows a reduction in the sector). Is this currency simply impervious or perhaps fundamentals no longer apply?
Chart of AUDUSD and the 20-Day ATR (Daily)
A Reminder: Fundamental Don't Stop Working
Let's consider first the notion that the Australian Dollar is simply unflappable. A currency that doesn't respond to negative news and updates is usually one in which an underlying bullish bias prevails. On the opposite side of the coin, a market that doesn't react to positive headlines is one generally stuck in the malaise of a bearish bias. Yet, there is an important caveat to both of these qualifications: a lack of response to one type of data establishes a bias only when there is a leveraged sensitivity to the opposite outcome. In the Aussie Dollar's case, it seems the currency doesn't react to either the bullish or bearish developments. This is where those that are ardent technicians or only casual fundamental visitors will point to the market and say, "this is evidence that fundamentals are not working (either permanently or simply for the time being)." Fundamentals do not stop working. They are always dictating trade decisions as it references the motivations for why market participants are bullish or bearish, adding to a position or unwinding it. It just so happens that there are periods where no single motivation comes out as a principal driver and or where many various considerations compete with influence with mixed bearing for the currency. As it stands now, the picture is mixed with risk trends rising with restricted intent, its carry trade appeal throttled with its rate at a historical low and a debatable break in the trade war friction. This chaotic blend of fundamentals will end eventually, but with the swell of a particular theme or the recession of all but one?
Chart of Equally-Weighted Aussie Dollar Index and CNHUSD in Red (Daily)
What Theme Will Likely Prevail and Having Options
When fundamentals compete for influence, it can be the case that there are two or more dominant concerns that are equally pressurized and thereby offset each other to render a market inert. This is a temporary and loaded state of affairs, but it happens. Other times, there is no pressing fundamental drive that is taking charge over a currency's bearings. With the Australian Dollar, we are dealing with the latter scenario - with a healthy dose of anticipation. Anticipation was heavy into the open of the week following the first wave of data as we still had to absorb the headlines for RBA monetary policy (RBA decision, policy statement, Governor Lowe's speech) as well as further key data (trade, retail sales and business sentiment). As important as all of these indicators may be, they were not likely the market movers traders were looking for. As with so many other assets and currencies in the market, the most leveraged possible driver for the Australian Dollar is a clear and unadulterated view of risk trends. Should risk appetite truly gain traction, it could leverage the currency's lost carry trade appeal. Fall apart and the connection to the US-China trade war and material downgrade in local data could expose it as a currency still not fully discounted. I will keep the multiple options in mind amongst the Aussie crosses for different scenarios. The AUDCAD and AUDNZD are less dependent upon global risk trends as the counter currencies have similar proclivities, but that can target different options. Instead of AUDUSD and AUDJPY where the thematic connections are more prominent, the technical patterns are not as appealing. Therefore, my interest leans more towards EURAUD and GBPAUD. We focus on the unusual activity of the Australian Dollar in today's Quick Take Video.
Chart of AUDCAD (Daily)
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