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Daily Fix: The playbook for the week ahead

Chris Weston
Head of Research
Sep 19, 2019
It’s been a fairly upbeat end to the Asia trading week, where the clear talking point on the floor today has been around the October meeting of the Reserve Bank of Australia. The RBA flagged a cut in the September minutes, but we can add in yesterday’s soft employment data and a failure from the private sector to really respond to either the Scott Morrison fiscal stimulus or prior rate cuts, although that’s early days.

The view on an October rate cut has become mainstream not just among economists. But the rates market has gone some way pricing a cut above 80%. National Australia Bank and Citigroup moving their base case today for an October cut has resonated, with Aussie three-year Treasurys -3bp. In turn, it’s taken the AUDUSD through 0.6800, and we could be staring at a retest of the August lows. It’s also pushed the ASX 200 0.6% higher, and the index looks strong here.

AUDUSD daily

Small gains have been seen in the Nikkei 225 and Hang Seng, while we’re seeing buyers in crude. In FX, USDCNH is flat on the session, although the preference is to trade this pair from the short side despite the People’s Bank of China cutting its prime rate across multiple maturities. Where this shows a commitment to massage funding costs and keep economics supported — the Chinese mainland indices are up 0.2% or so.

Central-bank divergence is growing

It’s been a big week for markets even if implied vols have declined. The message I’m getting is that we’re getting closer to the lower limits on rates, certainly in the US and Europe. Of course, the Federal Reserve can, and will likely, go lower. But the push onto fiscal policy is growing by the week. That makes Australia so interesting, because not only is the public failing to really respond to rate cuts — although prior cuts still need to fully filter through — but consumers are failing to respond to tax cuts. One could argue the economy needs a quick and hard smack, and that could be a 50bp cut and a message of future QE.

In the video above I explore these themes, but I look at the week that’ll be. What could be the drivers, pricing on interest rates, while taking a real look at implied volatility to gain a sense of how the market sees the week ahead.

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