From the Floor: AUDUSD sets base for fresh push
- Aussie bounces back to 0.75 area after initial RBA-induced slump
- AUDUSD could test as high 'as 0.7800' amid dollar weakness — Van-Petersen
- Japan 6.6% of GDP stimulus prospect keeps equities 'positive' — Garnry
- USDJPY vols to slide to 10% unless BoJ delivers the 'unexpected' — Larsen
- Bonds unable to take flight as BoJ announcement looms — Fasdal
- MSCI Inc growth curve underpinnned by 'strong underlying growth' — Garnry
By Martin O'Rourke
The Reserve Bank of Australia overnight cut the interest rate 25 basis points from 1.75% to 1.50% intially sparking a slide in AUDUSD to 0.7391 before the rebound propelled the pair back above 0.7500.
"The RBA cut was in line with consensus and the knee-jerk reaction lower quickly got back up", says Saxo Bank's Asia macro strategist Kay van-Petersen. "AUDUSD could get back to 0.7600 soon and even to 0.7700 or 0.7800 if this period of prolonged dollar weakness continues".
"Event risk will start to kick in by about Friday", he says. AUDUSD was at 0.7556 at 0742 GMT.
As the currency soared, however, it was a different picture for equities.
"The market had been looking for some kind of forward guidance or more dovishness on cuts to come but that was most definitely not the case", Van Petersen says, from Saxo Bank's Singapore hub. "No-one's really expecting any more cuts to come through unless we get some big deterioration in the data".
As far as AUDUSD vols are concerned, the market is focused on two big strikes that expire today in New York at 0.7520 and 0.7540, says Dan Larsen from the FX Options desk in Copenhagen.
"The picture is dominated by these two strikes and they could have a gravity effect on the currency", he says.
The diverging AUDUSD (white) and equities (green) picture
With RBA out of the way, the path is clear for the potentially much more impactful Japanese stimulus package with something like 6.6% of GDP maybe on the table.
"Is this going to be a ¥28 trillion package with some ¥7 trillion in actual spending or might it be much, much more", says van-Petersen. "There is a big bias in the market towards an underwhelming package so this is something that needs to be watched if it is bigger than anticipated".
Larsen adds that the expectation in vols is likewise for a conservative package. "Unless something unexpected happens from the meeting, we expect vols to trade down to 10% from 11%".
USDJPY was at 102.49 at 0655 GMT.
Whatever the impact of tonight's package on USDJPY, stocks can only expect a "positive" impact, says Saxo Bank's head of equities strategy Peter Garnry, but he warns that oil's flirtation with sub-$40/barrel levels could prove to be a "showstopper" on a fresh equities surge.
Bonds too are somewhat flummoxed by question marks over the Bank of Japan package. The conditions for bonds strengthening are there, says bonds chief Simon Fasdal, pointing to weaker oil and some slippage in equities, but the BoJ announcement and weakness in Japanese government bonds in general is capping the sector.
The negative-yield era might be drawing to a close, however, Fasdal says. "Bonds look like they are crossing into a new trend of positive yields and we definitely think that this is the direction in which they are headed".
Elsewhere in the bonds segment, peripherals in the likes of Portugal, Italy, and Spain were all boosted by the bank stress results, and emerging markets continue to look like they could extend their upward trend dating back to January.
"There is some concern that the lower oil price could hurt the likes of Russia but this has been a non-stop train and and it is too early to consider downscaling your exposure to emerging-market bonds", says Copenhagen-based Fasdal.
Check the index
If youre in the mood for a flutter, you could do worse than check out MSCI Inc, the industry leader in indices, says Garnry.
"This might frighten some as it has been so impressive and you are buying into multiple highs over the last four years but there is such strong underlying growth in the segment and the upside is enormous", he says. "MSCI has strong EBITDA margins and with ETF at $3 trillion in AUM for Q2, that's only a tiny amount of the overall market".
"This move into the passive ETF is a long-term trend that will continue for decades while they are also less sensitive to overall economic cycles", says Garnry. "It's almost a no-brainer".
MSCI Inc is riding a powerful wave that should only get stronger
If gold is your colour then you might be tempted by an options push based on gold breaking resistance at the $1360-80/oz area, says Larsen.
"We could see a road open to $1,500/oz with three-month vol levels relatively low and risk reversals relatively high", says Larsen. "If you are of the opinion that gold could go significantly higher, then it could be a good time to buy options in that direction".
Gold was at $1,351.10/oz at 0655 GMT.
Martin O'Rourke is managing editor at Saxo Bank
Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.