- RBA to Keep Rates Unchanged – Peter Rosenstreich
- Mario Draghi Does Not Threaten Bitcoin – Yann Quelenn
- CAD Looks Exposed – Peter Rosenstreich
- China Online
FX Market – RBA to Keep Rates Unchanged
We anticipate that the Reserve Bank of Australia (RBA) will leave key interest rate at 1.50% while maintaining its neutral policy stance. On the economic front the economy has expanded in 2Q by a healthy 0.8% q/q, indicating that GDP growth in 2017 will likely hit the higher end of the central banks forecast. The labor markets, which remain a concern for the RBA as unemployment ticked higher in the early part of the year, is now has trending lower. Australia unemployment rates has fallen to a 3-year low at 5.60%. Yet, inflation remains weak as 2Q printed at 1.9% y/y, below the RBA’s target range of 2-3%. Concern over the soft inflation outlook was amplified as AUD strengthen, causing policymakers to voice their displeasure over the last two meetings.
The strong currency was seen as a drag on the economy, through higher commodity price but slowed momentum of inflation via imports. The fall in AUD over the last two weeks has not eased the RBA thinking that the currency was the primary risk factor. The RBA need to see a clear trend of AUD weakness before hinting that tighter monetary policy is coming. Higher US treasury yields have affected yield sensitive currencies in the G10 and EM. Pause in the rise of US interest rates has given AUD bulls time to recovery but not much else. In addition renewed weakness in iron ore futures has also hurt AUD. AUDUSD need to close below 0.7807/10 support to establish extension of current correction phase.
Elsewhere, the RBNZ languages around the NZD was slightly less aggressive stating, deprecation"would help" and "increase tradable inflation and deliver more balanced growth." RBNZ left the OCR at 1.75% for the 6th consecutive meeting and seems in no hurry to increase rates. With strong economic developments and monetary tightening that will materialize in late 2017 AUD, EUR and GBP should outperform NZD in the near futures.
Economics – Mario Draghi Does Not Threaten Bitcoin
This was one comment that seems at first sight very bullish for the bitcoin, the most famous digital currency. Earlier last week Mario Draghi, in its statements to the European Parliament’s Committee on Economic and Monetary Affairs has mentioned that the European Central Bank has not the mandate to prohibit or regulate Bitcoin. There is now not a single week without at least a mention of the cryptocurrency. Out of this comment, the price has gotten a boost and is back above $4000.
For the time being, it turns out that big institutions are not in a hurry to regulate. Yet, we believe that the power of money creation is one very important power that are not going to be given up. Cryptocurrencies remain unregulated at the moment but, ironically, new derivatives are going to be introduced by next year on the Bitcoin and should, by the way, likely weigh on prices. Story repeats itself and gold price has been driven lower by paper contracts. The ratio between paper and physical is currently higher than 200 according to the latest disclosure from the CME. One can perfectly imagine what impact it may trigger when derivatives are going to be introduced on Bitcoin.
Right now, the Bitcoin price is holding above $4000 and there are consistent upside pressures. The price is likely to rise again. We do not consider that this is a "tulip mania" the bubble name of the hyperinflation that occurred in Netherlands. It is rather another way to store wealth. The debate is still open regarding this question but there is something that we know for sure. The bitcoin price is not in a bubble, there are plenty of upside for the digital currency. It is just a matter of time before we get back above $5000.
Economics – CAD Looks Exposed
Bank of Canada was one of the first Central Banks to honor the thinking that inflation would no longer the primary determinate of interest rate policy. The banks unexpected 25bp hike on 6th September policy meeting, backed up the talk with real action and caught the market short CAD. Since then the pace of the BoC tightening cycle has been hotly debated. A combination of rising US yields and comments by the BoC policymakers stalled the USDCAD downwards trajectory. Whether the short squeeze is a lasting trend or merely a temporary distortion will be based on external events but also Canadian policymakers comments.
Governor Poloz’s assertion that their interest rate path is not preordained and data depended, is a common central bank tactic. However, the tone of his speech indicated that a pause is more probably than a follow-up hike in October. Governor Poloz stated there was "is no predetermined path" for rates, policy will be "particularly data dependent" and the BoC will "feel" its way through policy development. Despite nothing new in these comments, Governor Poloz cautious tone suggests a shift from hawkishness and a pause in the BoC tightening cycle after back-to-back hikes. Given the change in language and softening in broader economic data we have penciled the next move in December.
USDCAD has become increasingly sensitive to disappointing economic data indicating the uncertainty around the BoC policy path. Positive USD sentiment, repricing of the Fed policy path and increasingly expectations for US tax reform has given the USD a new lease on life. Given our expectations for higher US rates, US-Canada yields spread is likely to widen benefiting USD. In the mid-term we become more optimistic on Cad but for right now we would remain long USDCAD for a test of 1.26/1.27.
Themes Trading – China Online
Chinese stocks are still reeling from the all-out collapse of local equity markets. Yet while valuations have suffered, the fundamentals remain enticing.
China is undisputedly the largest internet market in the world in terms of its user base, with 620 million users -nearly double that of India and triple that of the USA. Yet the penetration rate is only 45%, compared with 84% for the USA, which means there is significant room for growth. According to Kantar Retail, China has become the world’s largest e-commerce market, with sales of $589 billion in 2015. China has developed its own online offering catering to the country’s unique culture. Western companies have had a challenging time breaking into the market due to structural and cultural issues. The result has been the incubation of innovative world-class private enterprises. As China shifts from investment- to consumption-led growth, these agile entrepreneurs will also benefit from support and protection from Beijing. With valuations in the single digits, these names offer significant upside potential.
For this theme, we included social media, search engines, retail and B2B commerce, travel and key hardware manufacturers.
