IG Markets - morning thoughts and opening prices

IG Markets - morning thoughts and opening prices

Ahead of the open, we are calling the Aussie market up 0.6% at 4008 despite a mixed performance in US and European trade. Although US factory orders data disappointed, optimism that European leaders were ready to take action to combat the sovereign debt and banking crisis kept the sellers at bay. With no major headline risk crossing the wires, no news certainly seems to be good news these days. The local market closed right at its lows yesterday (3985) in a session that was relatively one-way traffic. With such downward pressure into the close, it wouldn’t be surprising to see the market test this low again in the near term. The local economic calendar is quite busy today, and therefore a volatile session is on the cards. We start off with the AIG services index this morning, followed by current account numbers at 11.30am. The finale will be the RBA’s interest rate decision and rate statement.

The divergence in views between what the market is pricing in and what economists are expecting suggests we could see heightened volatility at today’s RBA rates decision. As it stands, the swaps market (OIS) is pricing in a 68% probability that we will see the RBA cut by 50 bp (basis points), so a 25 bp cut seems to be a done deal, and traders see a good chance of more. The statement will also need to be dovish enough that it justifies six rate cuts over the next twelve months. Economists on the other hand are mixed, with only four calling for 50 bp, 11 for 25 bp and 12 calling for the Central Bank to stay on hold.

The case for a 50 bp cut is certainly compelling given the deterioration in the global backdrop, but will this be enough to force the Bank’s hand, or will the RBA leave its powder dry and wait to see how the Greek vote (June 17) goes? Friday’s US jobs report could be the swaying factor, with a synchronised global slowdown being seen in China, Europe, the UK and other parts of the emerging markets. There is a mix in poor domestic retail sales, company profits, and house price declines, while on the other side of the coin strong capex figures show the two-tiered economy front and centre.

How to play it then? Clearly given the expectations for a 50 bp cut and net short positioning held by leveraged funds from a pure risk/reward perceptive, it could favour being long AUD going into the announcement; even if it cuts by 25 bp, there is a chance we could see a pop in AUD, although the fireworks happen if it leaves rates on hold. Look for AUD/USD to potentially test 0.9923 (38.2% retracement of the April to June sell-off). If we see a 50 bp cut, there will still be downside but not to the magnitude if the RBA were to leave rates on hold. AUD/CAD will be interesting given the BOC still has a tightening bias, and we expect the pair to test the former downtrend support at 1.0057. AUD/NZD is the purest read on rate expectations, and we can see as markets have priced in more aggressive easing as the pair has moved lower and is down 1.8% from the May high. If we see a 50 bp cut today, look for the pair (which has recently broken its former uptrend) to potentially head towards 1.2785 (50% of the April to May rally).

On a stock level, we expect a strong start for BHP, with its ADR pointing to a 1.8% rise to $31.32. It will be interesting to see if the resource space can hold on to early gains, as commodities were generally lower. Newcrest Mining will be one to watch on reports it will triple its gold output in the next five years at Bonikro mine in Ivory Coast, according to Mines & Energy Ministry. Elsewhere in the gold space, a block trade of 16.63 million shares of Ramelius Resources crossed at $0.47 yesterday, representing 5% of the company. Sundance Resources, which is under a takeover offer, has agreed key terms of Mbalam Iron Ore Project Convention with Hanlong Mining and representatives of the Cameron government. A big day for rates also implies a big day for interest rate sensitive stocks, like the retailers and also currency sensitive stocks. Banks will also be in focus, as a rate cut would ultimately impact their margins.

IG Markets provides round-the-clock CFD trading on currencies, indices and commodities. The levels quoted in this email are the latest tradeable price for each market. The net change for each market is referenced from the corresponding tradeable level at yesterday’s close of the ASX. These levels are specifically tailored for the Australian trader and take into account the 24hr nature of global markets.

www.igmarkets.com.au

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