Aussie and Cad Dollars Fall From Grace

Despite the Loonie out performing its peers of late, the currency outright (1.0490), has managed to print a fresh six-week low on the back of a failed German 10-year bond auction. Demand for the offering saw only Eur+3.9b coveted from the Eur+6b issue. The market has had all morning to try and explain away the poor interest. However, risk aversion trading strategies are again in demand with growth and interest rate sensitive currencies bearing the brunt. Despite this morning’s mixed US data, the commodity sector, especially crude, is dragging the loonie lower.

The currency has fallen -4.1% against the US this month as crude oil, Canada’s largest export, failed to sustain a rally above the psychological $100 a barrel. Raw materials such as gold and copper that account for about half the country’s export revenue fell after manufacturing in China slowed. Earlier this morning, the HSBC China flash PMI fell -3.1pts to 48.0 this month, much weaker than the seasonal fall of -1.3pts. Analyst do note that the HSBC PMI has not been correlating well with the official PMI, and suggest that the decline may be somewhat exaggerated. Capital markets believe that China’s growth is “slowing but is not heading for a hard landing”. The market’s white or red Knight sustainable growth concerns is having an adverse effect on antipodean and commodity currencies.

The CAD continues to trade off global ‘toxic’ themes which will likely see it test the medium technical market target above the 1.0550+ handle. Above these levels there is both sovereign and corporate interest to own some CAD dollars. Yields in Canada’s broad bond market are at the tightest relative to global peers in more than two years as the country’s stable economy attracts investors fleeing political gridlock in the US and Europe’s debt woes. Canada’s bonds are the best performers this month amongst the G20 after Australia and the UK. The EU debt crisis has driven yields on Italian government bonds to a euro-era record while France has seen its credit-default swaps jump to the widest ever.

As we approach the 25th of the month, the market can expect some “oil settlement” sellers of US dollars, however, with this shortened trading week, liquidity will remain a premium. The loonie has seen the biggest drop amongst G10 currencies after Kiwi and Aussie. In contrast, JPY has appreciated +5.3%.

The Aussie is being attacked from all quarters (0.9680). The currency dropped to its weakest point in more than a month this morning after the disappointing HSBC flash PMI release. With China being its largest trading partner, any negativity from the Red Knight and the antipodeans are whitewashed with aversion activity. The market has seen a combination of model and macro accounts combining with intervention-linked sales of AUD on Central bank rebalancing. Real money, despite being on both sides outright, has been a net seller today, again for rebalancing purposes.

Aussie data earlier this morning showed that construction work done surged +12.5%, q/q, in Q3 (strongest in 25-years). It was mostly driven by the mining project pipeline. The release is to lift Q3 GDP growth substantially on December 7 and analysts suspect that it could make rate decision announcement on December 6 more difficult. Expect a worsening Europe and softer China to influence a “rate change”. The OIS market is currently pricing in -33bps of cuts.

Again option barriers and commodity prices falling from grace has accelerated the currency downfall towards the session’s lows (0.9670). The Aussie parliament passing the mining tax in the lower house of parliament (still needs to pass upper house, however there is a majority) is not a good news currency story, however, it is one of the lesser negative variables. Due to the illiquid nature of the sessions, it’s reported that momentum accounts are not playing, most likely because they are already short.

The RBA Governor Stevens is speaking this evening and may provide an indication of the next policy step. With global mass uncertainty and growing concerns about the nature of the growth profile for China going forward will have the likes of the AUD and CAD under pressure as markets reassess global demand for commodities.

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