The RBA surprised the market with not moving rates on May 7th. As we wrote, the market would jump but fade that rally as it would not last long. The Aussie dollar peaked at 0.7047 immediately after the announcement and fell all the way to 0.6863, then we had an election. There was always going to be a bounce on the election outcome too, no matter which party won. Markets do not like uncertainty so once it was a clear winner the buyers came in. However, we have pretty much trod water since as we await the next RBA meeting on June 4th. The ASX website produces a Rate Tracker every night, based on the price of the shortest interest rate Futures contract. It has been sitting on a 100% chance that the RBA will cut rates since May 24th. The fact that the Aussie dollar has not moved under 68 cents yet suggests there is still some selling to be seen and most likely at 230pm June 4th if the rate cut comes through.
Elsewhere in FX, the US dollar continues to dominate all with the shorts on all currencies outside of US still increasing. The Yen however is at a critical point. In early Feb the Commitment of Traders showed the yen speculators increasing their positions from balanced to heavily short. This was through a period to mid-April. That saw the yen move from 110 up to 112. Now that the USDJPY is trading in the low 109’s would mean there is a lot of those speculators hurting and looking to get out. This means that they must become buyers (to close their positions) and may even then go long. The shift into buying Yen comes from the flow into the Japanese Government Bonds, and the safety (safe haven) that the JGB’s provide. This flow happens when markets perceive troubled times now or in the future. Think trade wars, military wars, stock market melt downs. We are currently in the throes of two of those.
The stock market is battling two major issues that are coming to a head at the same time. Trump’s tariff tantrums and global growth weakening – led by the peak in US economy. The US economies major signals all peaked in December 2018 and have been steadily lower since. That was also the month of the last rate hike by the US Federal Reserve. The yield curve – that we have discussed many times on this blog – continues to deteriorate with the Fed Fund rate at 2.5% and only the US 30-year Treasury Bond has a yield higher than that. You can click on this link to see the latest rates https://www.bloomberg.com/markets/rates-bonds/government-bonds/us. The US implied rates is now forecasting 2 cuts this year.
So, after the first quarter of no rate action, things are starting to heat up again and this means good things for FX traders as we start to see trends again. Sell the active doves and buy the fence sitters.
The northern hemisphere summer normally brings some doldrums into stocks. The S&P 500 is below 2800 recently, which is also the 5% retracement from all-time highs in mid-April, so I suspect we will see some protracted selling. The next key level is 2700. That is 10% from all time highs, which is the official level for a “correction”. As I write today, May 31st, Trump is at it again, this time for the poor Mexicans with an extra 25% imposed tariff on imports. He still has China in his sights, and Europe will be next.
Combine these two battles and I think we might see the S&P500 down to the 2019 open price of 2478 before the end of summer.