Today’s Key Market Drivers: 9th August 2019

Risk sentiment turns positive. But for how long?

Thursday’s US trading session saw risk sentiment turn positive once again with the S&P 500 rallying 2% erasing some of the steep losses from last Friday and Monday’s falls.

There was nothing announced or implied by China or US trade officials and Thursday’s rally was simply a case of optimistic buyers attempting to catch some potential lows in price.

One notable market that has been impacting trader’s sentiment is the bond market. Bond yields (the return investors get for lending governments money) have recently been plummeting and the yields have stabilised and this has given traders some confidence to enter back into stocks.

Why has the Euro rallied so strongly against the AUD and NZD?

The Euro has been on a rocket ride higher against the AUD and NZD since the middle of July and part of the reason why the Euro rallied so strongly against emerging market currencies which included the AUD and NZD is because investment banks and hedge funds have been selling down their holdings in currencies that have a “carry trade” advantage. Let me explain.

European investors such as Sovereign Wealth Funds or large Investment Banks or Hedge Funds throughout Europe get 0% interest on their money deposited in a European Bank. In fact, in Switzerland, they will charge you for the privilege of having money on deposit at a Swiss Bank as interest rates are below zero. So, these very large funds and investors look to other countries they can get a stable return on investment where interest rates are higher.

If their money (and some of it was) was parked at the Reserve Bank of New Zealand this time last week they would be enjoying 1.5% per annum rather than 0% in Europe. If they’d had money at the Indian Central Bank this time last week, they’d be getting 5.75% annually and this time last week at the Thai Central Bank they’d be enjoying 1.75% on a yearly basis. Fast forward to this week and those same Central Banks are paying less and advising markets in their monthly statements that further interest rates cuts may be coming. In New Zealand the RBNZ this week dropped their interest rate to 1%, in India they dropped theirs to 5.4% and in Thailand, they also dropped their interest rate down to 1.5%.

What we have been seeing is large investment banks and wealth funds sell down emerging market currency holdings where they have been enjoying higher interest rates. These higher interest rates at the Central Banks are now getting less and less so they are repatriating their money home, in this case into Euro’s and this is why we have seen a rally on the Euro over the course of the last few weeks.

This trend will continue if emerging market Central Banks continue to lower interest rates (and they will), so don’t expect that holiday to Europe to get cheaper any time soon.

Stocks were up but the safe-haven currencies remained well supported.

Usually, when we see a strong rally on global stock indexes, we see the Yen and Swiss Franc sold off but that was not the case through the back half of the US trading session on Thursday. That’s a signal to me that all is not well when it comes to trader’s confidence and my view remains that the likelihood is, we will see further falls in risk currencies such as the AUD and NZD and we will also see new lows on stocks in coming days and weeks.

Financial markets are very correlated and when you have been trading for as long as I have there are little signs the market gives off when all is not right and Thursday’s rally on stocks and rally on the Yen tells me that uncertainty still reigns.

RBA Governor could rock the Aussie Dollar this morning.

The Governor of the Reserve Bank of Australia Philip Lowe is delivering his semi-annual address to parliament today beginning at 9.30am AEST. His testimony will be closely watched by traders inside investment banks and hedge funds for any forward guidance on interest rates and the state of the economy. As I mentioned last weekend it is unlikely that Governor Lowe will contradict himself by saying something in Canberra today that was not within the RBA’s official statement to the market when it released its August monthly policy statement on Tuesday.

I am a critic of the RBA and how it continues to remain so upbeat about the future outlook for the economy. Don’t get me wrong, I am an optimist but what pisses me off is when the RBA for years has got it so wrong with its assessment of wages growth, GDP and inflation. Just tell it like it is for a change, blind Freddy can see the economy is in trouble.

China posts better than expected trade data.

Certainly, the better than expected China trade data on Thursday helped boost the Aussie and Kiwi Dollars however I still believe the technical and fundamental trends suggest a move to the upside will likely be short-lived.

Don’t overthink it.


About the Author: Andrew Barnett

Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).

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