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Investors in wait-and-see mode ahead of BoC and Draghi
Risk-off sentiment persists, Aussie growth disappoints
Global equities tumbled on Wednesday as the uncertainties stemming from the North Korean situation returns. The Japanese Nikkei was down 0.14%, while the broader Topix edged up 0.08%. In offshore China, Hong Kong’s hang Seng was down 0.60% while in Taiwan the Taiex slid 0.66%. The picture is not much brighter in Europe: the Euro Stoxx 50 was down 0.30%, the DAX fell 0.20% and the CAC 40 slip 0.27%.
In spite of this small equity sell-off, demand for safe-haven assets remained subdued. The yellow metal was even edging lower, down 0.20% to $1,337 an ounce. In the FX market, the Swiss franc and Japanese yen were trading sideways. It seems that investors do not where to stands and are becoming increasingly impatient to get out this rollercoaster. Draghi will - mostly likely - unveil the ECB monetary policy plan tomorrow. This should at least reduce uncertainty partially. They will have to wait until September 20 for Yellen.
The Australian dollar took a hit overnight amid disappointing growth figures. The GDP grew 1.8%y/y, slightly below the 1.9% expected by most economists. On a quarter-over-quarter basis the economy grew 0.8% compared to 0.9% medina forecast. Nevertheless, the jump in growth compared to previous quarter data is quite substantial as the expansion was limited to 0.3%q/q. The only blot in this otherwise encouraging landscape is the drop in household saving ratio from 5.3% in the March quarter to 4.6% in the June quarter, while at the same time household spending increased 0.7%q/q. This raise the question whether the pace of growth is sustainable in the medium to long-term and if not when it will kick back economy growth as Australian start to save money again.
AUD/USD eased as low as $0.7974 this morning before stabilising slightly below $0.80. On the medium-term, the pair is still trading within its multi-month channel (0.7787-0.8066). it should remain so ahead of Draghi and most importantly Yellen in two weeks.
BoC to hike
Watch CAD on BoC meeting today
At today’s Bank of Canada monetary policy meeting we now expected a 25bp hike. The Canadian economy has accelerated for multiple quarters and expectations for rapid rise in inflation will persuade the bank to act now. However, there is a high probability the bank opts to hold to due to high level of household indebtedness and interest to monitor developments at the Fed. Either way we suspect that long CAD short USD would be a solid way to play the current environment. As strong worded comment that indicates further tightening (October if not today) will likely catch the markets behind the curve with only 65bp of hikes priced in until the end of 2018. USDCAD downtrend still in play with break of 1.2414 signaling a bearish extension targeting 1.2128.
Singapore a proxy for solid global growth
Singapore provides a solid barometer for the health of the global economy. In the Monetary Authority of Singapore (MAS) quarterly near-term outlook, called “Recent Economic Developments in Singapore” there is a clear expression of optimism in the outlook for the global and domestic economy. In particularly the bank highlighted sustained momentum in electronic industry. The MAS stated, “firm external demand conditions, coupled with the upturn in the global IT cycle, will continue to impart positive spillovers.” The MAS report revised higher G3 growth projections for both 2017 and 2018 to 1.9% from 1.8% in June. Despite negative geopolitical headlines clouding the markets outlook (North Korea a primary disturbance to investors risk appetite), according to the MAS conditions remain positive. Slow and steady global growth continues to support demand for EM currencies in the near term.