Global Markets Overview – 12/17/13

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By Evan Lucas, IG Markets Strategist | December 17, 2013 10:28 AM EST

The meaning is in the detail for the AUD

As the global markets continue to look towards Thursday morning's announcement from the FOMC, Australian investors will be watching two very interesting public policy papers that are released today.

Today sees the release of the RBA policy meeting minutes and the federal government's mid-year budget, and both will affect the AUD in distinctly different ways.

First out of the blocks will be the RBA minutes; the market has seen a master class in how to finesse monetary policy over the past three months. Steven, Debelle and Lowe have all publicly spoken about 'possible intervention' in the currency markets, the 'historically high state of the AUD' and the 'effect it is having on the economy'.

Monetary policy is no surgeon's scalp at to target specific weakness in an economy; it is an art rather than a science and variables outside of the board's control are pulled regardless of the care taken.

Therefore the minutes will have plenty of detail as to how the board currently views the state of play, however I believe it will be light on specifics for the reasoning stated above.

The easing basis that has remained in the final paragraph of every statement since November 2011 will be there as a back-stop to the green shoots the RBA sees in housing, consumer sentiment, and forward guidance. 

The net effect I believe will be AUD neutral; the bank is working overtime to make sure the exchange rate remains sub 91 cents in the short term, and it definitely wants the AUD below 85 cents in the medium term. Hawkish minutes are the last thing the board will want to release.

What will also be very interesting to watch is assistant Governor Guy Debelle's panel discussion at 11:15am AEDT. If he openly discusses policy levers the board may take to move the exchange rate, the minutes could be a non-event on its release at 11:30am AEDT, as the AUD may move lower on his comments. If he doesn't cover the AUD, the most likely move in the exchange rate is higher, as the minutes are likely to be interpreted as 'more neutral'.

The second policy paper of the today will be the release of the mid-year economic and fiscal outlook (MYEFO). The questions for the market will be how big the deficit is and is it likely to see the federal government change tact on spending?

I will leave the politicking to politicians however I will be watching for values around infrastructure spending and cuts to programs in the area of government administration and 'waste'.

It looks like the federal government is going to move towards a slightly looser spending program considering the 'bad economic' statements from the government over the past week. I would be watching the equity space to gauge reactions from the MYEFO, particularly engineering services, telecommunications and education providers. I would also watch the AUD to gauge 'how bad the economy really is' - it will fall if the public purse in under real pressure.

The MYEFO is due to be released after 12:00pm AEDT.

Ahead of the Australian open 

The ASX 200 is finally taking offshore leads positively.  The index is pointing to a 45 point gain on the open to back above 5100 points to 5135, as bank dividend payments hit the trading floors and manufacturing data the world over beat expectations. I will quickly mention France here which is contracting faster and harder than expected. This could be a nation to watch in 2014 as the Hollande government struggles to get the French firing and this may be a catalyst for volatility next year.

BHP's ADR is showing positive signs and is suggesting BHP could add 23 cents to $35.89, however iron ore is finally starting to contract another 1.1% to US$134.90 a, tonne having been $139.80 a tonne last week.

Trade toady should be bid well as $8.7 billion in dividends payments return to shareholders over the next three days. What will make it interesting is where these funds are invested - equities, currencies or cash - that is the question.

Market

Price at 6:00am AEST

Change Since Australian Market Close

Percentage Change

AUD/USD

0.8943

-0.0010

-0.11%

USD/JPY

103.0050

0.1450

0.14%

ASX (cash)

5135

45

0.89%

US DOW (cash)

15882

184

1.17%

US S&P (cash)

1786.7

19.7

1.11%

UK FTSE (cash)

6517

112

1.74%

German DAX (cash)

9162

179

1.99%

Japan 225 (cash)

15335

107

0.70%

Rio Tinto Plc (London)

32.01

0.21

0.66%

BHP Billiton Plc (London)

17.68

0.10

0.57%

BHP Billiton Ltd. ADR (US) (AUD)

35.89

0.23

0.66%

US Light Crude Oil (January)

97.57

1.22

1.27%

Gold (spot)

1241.10

6.8

0.55%

Aluminium (London)

1794.50

-1

-0.04%

Copper (London)

7286.00

51

0.70%

Nickel (London)

14045.0

-9

-0.06%

Zinc (London)

1988.25

18

0.90%

Iron Ore

134.90

-1.10

-0.81%

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