AUD jumps on RBA, USD still firm

A veritable torrent of developments overnight for AUD traders, first as the January AiG performance of services index dropped all the way to 44.3 versus 52.1 in Dec, and then on very weak Dec. and Q4 Retail Sales report. AUD dipped on these before the Reserve Bank of Australia reassured AUD longs with a less dovish tilt than expected.

The RBA did raise the concern level and lowered the inflation level slightly, but the insistence on putting a positive spin on things and only lowering the growth outlook to 3.0% for the year when housing is collapsing is still quite a hawkish feat. AUD snapped higher on the RBA statement release, but on the sidelines another development may have provided more relief for the Aussie: the release of the Royal Commission report and its recommendations on what to do after its long investigation of Australian banks’ lending practices.

The headlines are that the report is far less harsh in its recommendations than feared and Australian bank stocks have ripped higher overnight to the tune of 5% in reaction. This article provides a good rundown. Our take is that the momentum for a credit crunch has already been set in motion, as housing price declines and the inevitable increase in non-performing loans provides its own self-reinforcing.

The rise in risk appetite continues to dominate, with local highs in many equity markets, new levels of tightness in the high yield credit spreads, and a new local low in the VIX since early October, when the whole equity market rout was set in motion. How much more can this market wring out of the dovish shift from the Fed since the December? That may be answered this week if US treasury auctions today through Thursday come in sufficiently weak to see a significant further boost in US yields. At some point, higher US yields would temper enthusiasm for risk assets. Outside of risk appetite, we focus in particular on USDJPY as it toys with 110.00 resistance, with higher US yields supportive of a test of higher resistance.

Chart: AUDUSD

AUDUSD in a pivotal area here after the RBA and Royal Commission report – a strong close toward the top of the range keeps the bears at bay and suggests risk of a further squeeze, but if today’s price action can’t hold and we close back south of 0.7200, bears may pounce for a push at the bottom of the range and then some.