Australia Focus : Relatively Meh

First, I would like to thank my friend The Dark Knight for his amazing spot on AUDUSD call on Monday for the weekly high in the AUDUSD was 0.8164 against his call for target of 0.8150-0.8180.



It is hard to attribute any credit to the “meh” Australian economy for any of the market moves this week except that it is all about its “relativity with the rest of the world” in spite of the  colourful reports telling us that the AUD strength is causing stock market weakness (using the German DAX excuse) and the AUD strength is due to its correlation with Gold.

For if we really want to, we can even blame the government for projecting a smaller budget deficit next year, A$35.1 bio versus market expectations of A$40 bio. Yes, the 5 bio difference in a world of trillion dollar QE programmes.

This is the 8th straight deficit for Australia and we should not worry about not having enough bonds to buy as they forecast shortfalls for the next 4 years (until next elections).

May 13 (Bloomberg) — Australia’s debt market is set to grow by 12 percent in the coming fiscal year amid the longest stretch of deficits since at least 1970. The nation still looks like a winner to jaded global bond investors.
With budget shortfalls forecast for the next four years and a deficit of A$35.1 billion ($28 billion) in 2015-16, the amount of Australian government debt securities outstanding is projected to rise to as much as A$415.5 billion by June 30, 2016. Bond sales will total about A$78 billion in the coming fiscal year, the government funding arm said Wednesday.
Thus the consensus remains that the RBA will be the only stimulus to growth if the government ain’t spending which keeps the rate cut hopes alive !
* Moody’s Says Australia’s Stable Outlook Supported by Budget

Not so for Western Australia which has based their spending projections on iron ore prices that were too high, remaining on S&P ‘s negative watch list after their state budget deficit, risking a downgrade.
But all is not lost yet but there are few bright spots left in the economy which has run out new gears for growth at the moment except for their housing bubble turning into a balloon and despite the bullishness in the currency, with futures positioning at a 6 month high.
I stick to my calls from last week.
“A massive shift in the bond curve over the past week and we have interest rates higher by some 0.25-0.45% over a month in the  >5 year tenors which has brought us back to where we were at the start of the year. Therefore I think the bond waters are starting to look safe again as 10 year yields back up towards 3%.
As for the currency, I believe we will settle for a new range 0.77-0.82 against the USD, after the massive moves of the past 2 weeks, and largely benefiting from commodity price corrections although the outlook for China dims much hopes for a sustained rally.”
I thought I should mention that we saw a 6 week high in the AUDSGD on Thursday when it broke above 1.08 briefly but failed to hold to its gains to close the week at 1.0612.


It does look like the start of a potentially promising trend but I am not entirely convinced given its weak closing so best levels to accumulate would be still under 1.05.
Leaving with the indicative bond prices.
aud bonds