Article / 05 August 2016 at 0:26 GMT

Today's Trade: Copper prices, RBA statement may impact AUD

Trading Desk / Saxo Capital Markets
  • The S&P/ASX200 has rallied by 11% in less than a month
  • The benchmark indexed has rebounded well from its post-Brexit vote low of 5,037
  • Investors are focussed on the impending US nonfarm payrolls release
  • Crude oil is up on speculation about trader behaviour
  • Iron ore prices have been smashed; they are down 3.5% to just $59.50 a tonne
By Saxo Capital Markets Australia

Overnight and early trading

  • The S&P/ASX200 headed higher at the open; it was up 0.27% to 5,490.50 at 1005 AEST (0005 GMT).
  • Government bonds rallied, while the pound slid against major peers, as the Bank of England cut its key lending rate for the first time in more than seven years. US stocks and the dollar traded in tight ranges as investors awaited Friday’s jobs report. Sovereign debt from the UK to Germany advanced with Treasuries after the BoE delivered what Governor Mark Carney called “exceptional” stimulus to preempt the effects of Brexit.

 Copper takes a beating ... the red metal posted its biggest loss in a week as industrial metals fell amid fears that stimulus moves won’t be enough to push up global demand. Photo: iStock

  • Sterling fell the most in four weeks as credit markets strengthened. The S&P 500 Index churned at a level less than 1% below its all-time high, while the dollar continued to trade within its narrowest band in more than a week. US crude oil rose past $41/barrel, extending its rebound from near four-month lows.
  • The BoE cut growth forecasts for the UK by the most ever as policymakers unveiled a stimulus package aimed at containing the fallout from the British vote to leave the European Union. While the pound retreated and bonds jumped, other assets showed little reaction to the widely expected move, with investors switching their focus to next session’s update on US nonfarm payrolls. Economists expect the report will show continued improvement in the labor market, a key factor for the Federal Reserve, which is mulling whether to stick to its plan to continue tightening policy in 2016.
  • The S&P 500 rose less than one point to 2,164.25, while Nasdaq 100 Index added 0.2%. US equities snapped a two-day retreat Wednesday as the crude rebound underpinned gains in energy producers, while corporate earnings buoyed financial companies. The index has hovered near a record over the past few weeks, and is trading at 18.4 times the projected earnings of its members, near its most expensive level in more than a decade. Investors are looking for clear signs of economic progress after data last week showed expansion was slower than anticipated in the second quarter, after a reading on jobless claims came in higher than forecast.
  • The Stoxx 600 advanced 0.7% in London, after falling earlier in the week. A gauge of lenders jumped 1.3%, the best performance among the benchmark index’s 19 industry groups, while the U.K.’s FTSE 100 Index soared 1.3%. The MSCI Emerging Markets Index climbed 1.1%, after sliding 1.6% over the previous two days. Benchmarks in Russia, Dubai and the Philippines gained at least 0.8%. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong rose 0.3%, rebounding from the biggest drop in four weeks.
  • Futures on Asian indexes signaled more gains ahead, with contracts on gauges in Japan, Australia, South Korea and Hong Kong up at least 0.1% in most recent trading.
  • The pound weakened 1.6% to $1.3107, its steepest decline since July 6 on an intraday basis, and lost 1.5% to the euro. The BOE also increased its asset-purchase target Thursday for the first time in four years, lifting it by £60 billion to £435 billion. The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, was up 0.1% after rising 0.3% on Wednesday, when emerging-market currencies led declines. Chicago Federal Reserve President Charles Evans told reporters last session that a U.S. rate hike “could be appropriate this year.” Odds on the Fed boosting benchmark borrowing costs in 2016 have dropped to 37%, with last week’s weaker-than-expected report on US gross domestic product damping prospects for tightening.
  • The yen was little changed at ¥101.22 per dollar, following on from Wednesday’s 0.4% drop. Japan’s currency has gained about 0.9% this week, as traders weigh the Bank of Japan’s decision last Friday to only bolster purchases of exchange- traded funds, as well as a fiscal package flagged Tuesday by Prime Minister Shinzo Abe.
  • South Africa’s rand jumped 1.5%, the most among major currencies, as early results in local elections showed the ruling party trailed the main opposition group in several major cities, while leading the overall vote.
  • The BOE decision propelled German 10-year bonds higher as yields on UK gilts slipped to a record low. Italian securities ended their longest run of declines in more than three months. Treasuries rose, with yields on notes due in a decade down four basis points, or 0.04%age point, to 1.50%.
  • Ten-year rates had jumped at the start of this week, as the record-setting rally in global bonds appeared to falter. Yields on German 10-year bunds lost six basis points to minus 0.10%. Yields on gilts due in a decade fell as much as 17 basis points to a record-low 0.634%, while those on 30- year debt slid as low as 1.468%.
  • West Texas Intermediate crude rallied 2.7% to settle at $41.93 a barrel. Wednesday’s 3.3% rebound came after US government data showed gasoline stockpiles fell by 3.26 million barrels last week, the most since April. Brent crude dropped 0.6% to $42.83 a barrel Thursday as speculation mounted WTI’s tumble into a bear market earlier this week would be short-lived.
  • Gold futures erased losses, climbing 0.2% to $1,367.40/ounce, after declining 0.6% on Wednesday. Last session’s retreat halted the precious metal’s longest rally in a month. Copper posted the biggest loss in a week, falling with most industrial metals amid mounting concern that global economic stimulus won’t be enough to push up demand.
  • Source: Bloomberg,
US earnings releases, Friday

  • Weyerhaeuser, Allianz, Virgin America, Buckeye Partners, Liberty Interactive

Local markets

  • Gold which was down as much as 0.7% erased losses following the interest rate cut by the Bank of England. The Bank of England Governor unleashed a package of stimulus, including the central bank’s first interest-rate cut in seven years, sending gold prices close to a three-week high. The stimulus, meant to contain the fallout from the U.K.’s vote to exit European Union, came as the BOE cut the nation’s growth forecast.
  • Gold futures for December delivery rose 0.2% to settle at $1,367.40/ounce on Comex, after touching $1,371.40. On August 2, prices rallied to $1,374.20, the highest since July 11. Bullion has rallied 29% this year as the Federal Reserve held back on tightening and other central banks pledged to do more to boost growth following the UK vote. As easy money prevails, traders will turn their attention tonight to the non-farm payrolls data from the U.S. government for clues on the timing for the next Fed rate increase. Low rates are a boon to precious metals because they don’t offer yields or dividends. Gold stocks in Toronto firmed 0.57% overnight. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, SAR, SLR
  • Crude oil rose amid speculation that traders who had bet on falling prices were buying back positions. Oil rebounded after tumbling more than 20% into a bear market, closing below $40/barrel on Tuesday for the first time since April. WTI for September delivery rose $1.10 to settle at $41.93/b on the New York Mercantile Exchange. Total volume traded was up about 20% from the 100-day average. Brent for October settlement climbed $1.19 to close at $44.29 a barrel on the London-based ICE Futures Europe exchange. The global benchmark settled at a $1.60 premium to WTI for October delivery.
  • US crude output decreased by 55,000 barrels a day to just 8.46 million a day in the week ended July 29, the EIA reported Wednesday. Stockpiles at Cushing, Oklahoma, the delivery point for WTI and the nation’s biggest storage hub, fell the most in six weeks. Nationwide crude inventories expanded by 1.4 mln barrels to 522.5 mln, keeping supplies more than 100 mln barrels above the five-year average.
  • Gasoline stockpiles, which slipped to 238.2 mln barrels, remain 23 million barrels above the five-year average. Hedge funds upped their short position in West Texas Intermediate crude by the most ever for the week ended July 26, according to Commodity Futures Trading Commission data going back to 2006. The large short position leaves the market vulnerable to a quick rally. Short positions in the US benchmark rose 28%, with an increase of 38,897 futures and options combined, in the week ended July 26, according to the CFTC. Longs, or bets on rising oil prices, increased by 0.9%. Net longs tumbled 23% to the lowest since February. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY
  • Iron ore was smashed, down 3.5% to $US59.50 a tonne. A plunge in ferrous futures since early morning yesterday had brought gloom to the market, and although iron ore futures somewhat recovered later in the day after falling 3.6%, the damage to sentiment was already done. Enquiries were "not bad" after the futures market closed at 3pm, and some sellers at Chinese ports even tried to keep prices steady. But a "private discount" became a prerequisite for transactions, according to a trading source. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, ARI, BCI, SDL
  • Copper posted the biggest loss in a week as most industrial metals fell amid mounting concern that economic stimulus planned around the world won’t be enough to push up demand. Copper for delivery in three months declined 0.9% to settle at $4,831 a tonne on the London Metal Exchange. In the five sessions through Thursday, copper is the worst performer among six main base metals traded on the bourse. Nickel slipped 1.2%, the biggest loss Thursday among main metals traded on the LME. Aluminum, zinc and lead also fell, while tin advanced. Copper has lost 1.9% in August after advancing 3% in the first half of the year. Inventory in China’s bonded warehouses rose in July from a month earlier, according to Bloomberg Intelligence. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC.
  • Aurizon (AZJ): ACCC reviews Aurizon’s proposed acquisition of Glencore Rail NSW
  • Bank of Queensland (BOQ): Cuts home loan rates.
  • Crown Resorts (CWN): Melco Crown 2Q adj. profit/ADS, net operating revenue misses estimates.
  • Macquarie Group (MQG): EPH close to selling stake in EPIF unit to Macquarie: Sme
  • Metals X (MLX): Citi said to seek bids for Hindalco’s Metals X stake: AFR.
  • Mirvac (MGR): Said to mull 50% stake sale in Melbourne property: AFR.
  • MyState (MYS): Considering bid for La Trobe Financial: AFR.
  • Navitas (NVT): Cut to underperform vs neutral at Credit Suisse.
  • Newcrest (NCM), Evolution (EVN), Regis Resources (RRL), St Barbara (SBM): Carney’s stimulus package sends gold prices near three-week high.
  • Santos (STO): Rev. to rise on higher output, recovery of LNG prices: Bloomberg Intelligence.
  • SG Fleet Group (SGF): Buys UK co. Fleet Hire.
  • Suncorp (SUN): Ratings unaffected by full-year results: S&P.
  • Virgin Australia (VAH): Scheduled to release FY results; NOTE: Underlying profit before tax est. $A43.45mln (4 analysts).
  • Woolworths (WOW): Co. working toward hardware divestment outcome before earnigns released August 25: AFR.
Broker upgrades, downgrades
  • Automotive Holdings (AHG): Raised to buy vs neutral at UBS

Pending orders

S&P/ASX200 rallies

The S&P/ASX200 (AUS200) has rallied by almost 600 points (up 11%) in less than a month, since the post Brexit low of 5,037. The psychological level of 5,600 seems to have limited any further rally and the recent selloff from the big banks weighed down on AUS200 despite the rate cut this Tuesday.

We see this week’s decline as a profit taking for now but the key support level would be 5,400 which has acted as resistance level during August 15 – July 16, if the current downward momentum continues.
S&P/ASX200 trend
Watch for RBA statement impact on AUDUSD

The RBA monetary policy statement (1130 AEST, or 0130 GMT) could be interesting as AUDUSD appears to have ignored Tuesday’s rate cut. Looking at the bigger picture, the Aussie dollar looks to be forming an inverse head and shoulder with the neckline at 0.77, and we are expecting a continuation of the upside momentum.

The downside risk for the AUDUSD long would be the price actions of the copper (HG), which show weakness as the red metal broke its key uptrend on Wednesday. We also noticed a clear divergence between AUDUSD and copper since end of July. So we would be more convicted calling long on AUDUSD when copper starts to regain strength.

AUDUSD trend
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Sources: AFR, SMH, CNBC, BBG, WSJ, The Australian, Reuters

– Edited by Robert Ryan

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Today's Trade is compiled by the Sydney trading desk at Saxo Capital Markets.


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