Investors ignore politics. AUD may rally on fundamentals. China sinks. Another gain expected for dairy auction

By Raiko Shareef

If markets remain this settled heading into Friday’s FOMC decision, it could be a long week indeed. The USD is little changed overall.

AUD has outperformed, but by virtue of a short squeeze, rather than politics.

Equities are slightly lower and JPY appreciated, helped by a poor performance in China’s stock market.

In Australia, Tony Abbott has been ousted from the Liberal Party leadership by Malcolm Turnbull, who will become the third Prime Minister in just over three years. As our NAB colleague Tapas Strickland notes, there is unlikely to be any major change in government policy, the fiscal stance, nor of early elections. As such, currency and bond markets should be relatively unaffected.

AUD’s gains overnight are more a result of a paring of short positions, ahead of the FOMC. Positioning data shows net AUD shorts are at extreme levels, consistent with anecdotes that overseas investors are extremely pessimistic on the Australian economy. Our NAB colleagues are much more constructive on the Australian economy. If the RBA remains on hold, as our colleagues expect, then there is room for AUD to rally further, as short positions are exited. This is why we are hesitant to enter a NZD/AUD long position, despite the cross sitting near the bottom end of the range.

China’s benchmark Shanghai Composite Index shed 2.7% yesterday, its worst performance since late August. The poor industrial production and investment data released over the weekend likely had a role to play. Developed market benchmark indices are roughly half a percent lower across the board. JPY’s gains, despite its own weak industrial production data, look to have come off the back of this guarded stance from investors.

NZD traded in a tight 40pt range, caught between AUD’s outperformance and wider commodity currency weakness. We expect resistance at 0.6370, and support at 0.6250. Like AUD, there is a significant community of bearish investors, who may well be turfed out hastily on a spit above 0.64. However, NZD positioning is not nearly as stretched as in AUD.

The fact that there are US data releases at all should hopefully liven up markets this evening.

The Bank of Japan is not expected to spring new easing measures today, but there is a growing focus on the late October meeting, where nearly a third of analysts expect easing to be expanded.

While there’s no formal poll, we suspect the market is braced for another gain in tonight’s dairy auction. The upside for NZD should be relatively limited.

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Raiko Shareef is on the BNZ Research team. All its research is available here.