Following on from Friday, sentiment remained upbeat in off shore trade overnight assisted by a surge in US new homes sales and positive earnings outlook from Fed-ex. US stocks rallied with the S&P 500 finishing up 1.12 percent on the day assisted by a surge in new home sales which outstripped consensus. Home sales grew 23.6 percent in June against the expected 5 percent.The balance of risk fell to the higher yielding assets with copper rising to ten week highs which came at the expense of the greenback which continued a downward trajectory against major counterparts.
The Euro also remained well supported in the wake of the European bank stress test. This was the first real opportunity provided to investors to take a fully informed view. The common consensus amongst analysts appears to be ‘they've look under the hood but haven't really conducted the full service’. Despite continued criticism regarding the credibility of the tests; gains on European equities and the Euro suggests the very notion of transparency is acting as a supporting factor. Out of 91 banks under the microscope, 7 failed the minimum funds requirement of at least 6 percent of tier 1 capital. At the time of writing the Euro is buying US$1.2989 after briefly touching the US$1.30 level earlier in the session – however unable to convincingly break US$1.30.
There was only one direction for the Aussie to head pushing through the 90 US cent mark to highs of 90.35 US cents to represent 11 week highs. For the Aussie to hold 90 US cents and above we need to see a solid day in local and Asian equities. Although we don’t anticipate any major selling we could be looking at the an Aussie slipping through 90 US cents in domestic trade – the next major local catalyst for Aussie upside comes tomorrow with the CPI data due for release.
Wednesday’s Consumer Price Index is likely to sway opinion on what the RBA will do when they reconvene in August. Consumer prices are expected to have risen 1 percent in Q2 to represent annual growth of 3.4 percent from a previous 2.9 percent. With the RBA's target for inflation between 2-3 percent, any significant move north will likely increase the chances of a hike in August. However, we know the RBA have attributed headline inflation being above target due to recent tobacco tax hikes amongst other factors - the RBA however expects core inflation to moderate in year-end terms. Core inflation will be the telling point given the RBA expects if we take away the volatile items the headline figure shows, we're going to see inflation within target, albeit towards the upper echelons of target. The RBA is likely to react given inflationary pressures in underlying CPI come in stronger than expected.