Daily Australian Finance Report - andre di cioccio - News 12 October 2010

There was little data or news out last night. US bond markets were closed for Columbus day, and action was reasonably muted in the FX and equity space.  We’re all still waiting for the Fed, the FOMC minutes tomorrow morning and the run of Fed speak -  and that’s not to forget the strong dataflow towards week’s end. Remember this dataflow, and ensuing numbers out over the next few weeks are critical.  We are at an important juncture and it doesn’t pay to downplay it. Uncertainty is high and there are a variety of views out there. After this run of data we’ll be a in a much better position to assess some of the downside risks being touted – to determine who is likely to be right. We’ll pretty much have Q3 sorted and we’ll even get a glimpse into Q4. We’ll have a better idea as to whether the global economy will indeed deteriorate as many expect, accelerate or just plod along.

For the moment, markets are still expecting the Fed to print more money and that’s the best bet given their rhetoric. Nevertheless, USD did bounce a bit last night as traders took some profit. At the time of writing, Euro was down almost a big figure to 1.3875, Sterling was off 64pips to 1.5875, AUD was broadly unchanged at 0.9849 and Yen rose to 82.18 from 82.03. While we may have seen a bit of a bounce last night, emerging market concerns about USD weakness clearly remain high. Brazil has already taken measures to impose a tax on foreign bond purchases and Thailand announced yesterday that it is considering a similar action. Hot money flows are already a problem for emerging markets – as, by the by, are rising food prices caused by the falling dollar.

The reality is that if the Fed insists on debasing its currency, we’ll be seeing a lot more of this type of action.  So perhaps the PBoC’s decision to hike the reserve requirement by 0.5% to 17.5% (1st move since May) was driven, in part, by these hot money flows. Whatever the case, it is intended as a temporary measure (about 2 months) for the 6 largest banks to help rein in excess liquidity.  While we’re on China and the ‘currency wars’ etc I heard the Governor of the BoE say the most sensible thing I’ve heard him say in a while. He suggested that China can’t rebalance its economy in a couple of years. As far as I can tell this is the sticking point. China is actually revaluing the Yuan and while I haven’t seen the US publically declare how much of an appreciation they want, I’ve got no doubt, and history suggests, they want it to be radical. The question for the global economy is whether this is a reasonable expectation.

Moving on, and despite USD bouncing, commodities had a mixed session, with crude down 0.8% to $82.00, copper was up smalls and gold was basically unchanged at $1351.  Then to equities; they closed basically flat in the US after a decent session in Europe (+0.3 to +0.4%).  The S&P500 was down 0.01% (1165), the Dow was up 0.02% (11008), while the Nasdaq finished up 0.02% as well (2402). By sector there was no major departure from zero. Telco’s and energy were up smalls and industrials and basic materials were down smalls. For Oz, the SPI was up 0.01% (4718).

As mentioned US bond markets were closed and there wasn’t a lot of action elsewhere. Aussie futures ended unchanged (3s at 95.09 and 10s at 94.96) on a 3 to 4 tick range.

So that’s about it. No real data to speak of. To the day ahead and at 1130 we get NAB’s September business survey. No one formally forecasts this series, but I would be expecting a bounce in confidence given the pick up in the news flow and share market rally. Tonight, watch out for UK CPI, the FOMC minutes and a speech from the Fed’s resident hawk – Hoenig.

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