Global equities lower, Aussie dollar down 4% in a week, ASX futures down 32 points

After touching US$79.36 just Tuesday last week, the Australian dollar has fallen just over 3.2c or 4.1% to be trading now at US$0.7615 (see today's first Rivkin Trader chart). The AUDUSD is now sitting right at its support level set by recent lows in March and the market is now pricing in a 75% chance of a rate cut to 2.00% next Tuesday 7 April. The interest-rate differential theme is alive and well, meaning that FX traders are happy to play the Aussie dollar as a currency in a rate cutting cycle, versus the US dollar being in an environment where the only way is up (whenever that might be). And this is valid, given that the cash rate futures curve is pricing in an implied rate of 1.75% as at August 2014 and this prediction may only become more resolute once the Federal Budget is released next month.

The single biggest threat to the Australian economy is a sharp reversal of the interest paid on household debt. Australia's household debt to disposable income ratio is around 150% and has been for about a decade. Interest paid on that debt, however, has fallen quite dramatically (around 4% on average) since the days of 7.25% cash rates back in 2008 and current economic growth and consumer sentiment is certainly predicated on the serviceability of that debt. I dare say that the green line in the Housing Prices chart below would look markedly different if the RBA's cash rate was back at 7.25%. So the biggest macro concern for the RBA is not cutting rates to a point that helps inflate Australian growth, but overshooting on interest rate cuts and seeing the slack in the economy tighten up too quickly, thus forcing them to hike at swift pace. So while 1.75% seems to be on the cards for Australian cash rates, the RBA is going to be pressuring the Government to manage the economy as well as it possibly can so growth can be created without easier credit (through lower interest rates) and the creation of more household debt.

So while contracting Chinese GDP growth and commodity oversupply are painful factors for our resource economy and those with plenty of exposure to that sector, the scarier prospect could be a snap back in commodity prices and a resumption of the commodity super-cycle (I bet you haven't heard that word for a while) - so this mediocre environment we're in isn't too bad, the government just has to figure out how to collect more taxes and put a foot on (chiefly Sydney) housing prices.

Today's second Rivkin Trader chart shows the percentage moves in WTI crude (OILUS) and Brent crude (OILUK), year to date. I suggested a spread narrowing trade a couple of weeks ago and I know there was some interest in this. We're a bit narrower at present than where we were when I spoke about the trade, but you can see in mid-March that this trade widened and I would recommend not going overboard on this trade, given that it will likely play out over a longer time horizon with some bumps along the way. This trade is expressed by selling OILUK and buying OILUS in equal face value amounts, anyone interested can contact the Rivkin dealing desk. Those interested in range trading WTI crude (OILUS, see third chart) should consider buying the dips toward the US$42-$44 support and selling the rallies off the US$51-$53 resistance and running tight stops outside of that range.



Today‚Äôs charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to open a Rivkin Trader account now.

Upcoming economic announcements: AU AiG performance of manufacturing index at 9:30am, Bank of Japan Tankan report at 10:50am, Chinese PMI out at 12pm, US ISM survey at 1am, all Sydney time.


This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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