AUD to Overcome Hung Parliament?

The first hung parliament in post-WWII history spooked the market only briefly, as AUD has managed a sharp comeback from a gap lower. Any longer term fallout from this election?

The Australian election proved as closely contested as the polls indicated leading up to this weekend's vote and it appears that the Labor and Liberals are evenly matched in the parliament. Now, the two parties are struggling to see who can form a minority government, with the expectation that Labor is more likely to win over the support of three independents and a single Green party MP. The reaction in the market to the election news shows that the market was largely already positioned for the outcome, and also showed that AUD traders will probably revert quickly to watching the developments in risk appetite around the world, since equities were trading higher still after the positive close in the US on Friday.

Looking ahead

The economic data calendar for the week ahead is not particularly busy, but there is always room for a particularly large divergence from expectations to roil markets (especially in the German IFO and the US jobless claims and/or US durable goods orders data). Besides the data, we have massive US treasury auctions this week, starting with today's auction of 30-year TIPS and followed by auctions of 2-, 5-, and 7-year notes on Tuesday through Thursday. JPY crosses will be the most sensitive to the moves in interest rates coming out of these auctions.

But the key event with endless potential to affect the market not just now, but going forward, is the yearly Jackson Hole, Wyoming Fed symposium hosted by the Kansas City Fed. Bernanke will be speaking. The Jackson Hole event is often considered the premier chance for Fed policy makers to get together and intensively debat longer term monetary policy issues and the trajectory of policy. Other world central bankers from around the world are often also invited. The FOMC decided to largely "pass" at the recent FOMC monetary policy statements, but this event could provide a key hint on how the Fed will respond if the economy in the US continues to deteriorate, i.e., whether the Fed is making plans for the "real QE2" down the road. Observers will forever remember Bernanke's 2002 helicopters of cash speech. The critical factor going forward may not just be Bernanke's will, but also whether the chairman will find enough support within the FOMC and more importantly, whether the Fed's independence is threatened by a Tea Party controlled Congress in the years to come.

Another news item worth note is that the US FINRA - a financial industry regulatory agency - has announced that it intends to investigate brokers' role in the May "flash crash" event. The high-frequency trading issue is becoming more and more pressing as many participants are irate at the effects of their activity and as retail investors seem to have permanently lost trust in the market, as they have been consistently pulling their funds out of the market whether it is up or down in recent months. Stay tuned.

Economic calendar this week
Today we run down the rest of this week's economic calendar highlights. The most interesting data points this week.

Tuesday

• UK Jul. BBA Loans for House Purchase - the activity in the housing market has been dropping off slowly but surely in recent months as prices have begun falling again, now that low rates are no longer having any marginal additional stimulative effect. This could depress the UK numbers further in the months to come. The biggest question is whether inflation numbers also begin falling soon.
• Canada Jun. Retail Sales - the usual tardy report on sales from Canada. The previous two month-on-month readings were negative - very unusual in the history of the data series.
• US Jul. Existing Home Sales - expected to drop back to the lowest levels of the cycle despite this being three months after the expiration of the home-buying incentives.
• US Aug. Richmond Fed Manufacturing Index - one of the minor manufacturing surveys, but it will be analyzed for confirmation or refutation of the ugly Philly Fed number from last week
• US Weekly ABC Consumer Confidence - with the employment picture not improving, the confidence surveys seem mired at low levels for the duration

Wednesday

• Japan Jul. Merchandise Trade Balance - heading back lower again, possibly due to adjustment in JPY stronger - as that latter phenomenon eventually becomes self-correcting
• Sweden Aug. Confidence surveys - all confidence surveys are at or near highest levels historically
• Germany Aug. IFO - last month saw a sharp acceleration to new highs due to the effects of the weak Euro over previous months. This time around, we could surprise a bit to the downside due to the latest market nervousness and the surge in the single currency in July and part of August.
• US Jul. Durable Goods Orders - normally a volatile series, but always interesting to have a look at the details.
• Canada Jun. Home Price Index - looking for firmer signs that the Canadian housing bubble is deflating - this number a bit too tardy to use for anything other than rear-view mirror proof.
• US Jul. New Home Sales - after the sharp deceleration in the NAHB survey of late, we should expect another weak number.

Thursday

• US Weekly Initial Jobless Claims - this number getting plenty of focus after last week's rise to 500k. Remember that this is a tricky season for claims, so we won't have a better feel for the job market until perhaps October at the earliest.

Friday

• Japan Jul. CPI - Japan has been posting some of the lowest core CPI readings in its history (below -1.5% YoY), and the strong yen is doing nothing to alleviate the situation. One wonders when the official response will arrive.
• Japan Jul. Overall Household Spending - YoY numbers are beginning to edge back into negative territory recently.
• Sweden Jul. Retail Sales - Sweden's numbers have been fairly strong, but end consumption may be decline soon with housing bubble which is now under threat from a tightening Riksbank.
• US Q2 GDP Revision - this has been getting a lot of attention, as a strong downward revision is expected and with questions on whether Q3 will show any growth at all.
• US Aug. Final University of Michigan Confidence - the former trend of improvement has been spoiled by the last couple of months of data - likely a symptom of the still miserable US employment market.

US Fed's Bernanke to Speak on Monetary Policy and Economic Outlook after this week's Jackson Hole, Wyoming symposium

Economic Data Highlights

• Germany Aug. Preliminary PMI Manufacturing out at 58.2 vs. 60.5 expected and 61.2 in Jul.
• Germany Aug. Preliminary PMI Services out at 58.5 vs. 56.3 expected and 56.5 in Jul.
• EuroZone Aug. Preliminary PMI Manufacturing out at 55.0 vs. 56.1 expected and 56.7 in Jul.
• EuroZone Aug. Preliminary PMI Services out at 55.6 vs. 55.4 expected and 55.8 in Jul.
• US Jul. Chicago Fed National Activity Index out at 0 vs. -0.1 expected and -0.7 in Jun.

Upcoming Economic Calendar Highlights

• EuroZone Aug. Consumer Confidence (1400)
• US Fed's Hoenig to Testify at Congressional Hearing (1430)