There’s been plenty for investors and traders to mull over in Asia today and, as usual, the first reaction is not always the right one. Firstly the BoJ minutes caused a 30 odd point sell-off to 93.57 after current Finance Minister Taro Aso suggested the government was not considering a change to BoJ law ‘right now’, while also saying it was not considering buying foreign currency bonds. The fact that the pair and subsequently the Nikkei found buyers from the lows is testament to a market that sees this as old news, and they can still do it in future if it doesn’t look like they will achieve the highly optimistic task of its 2% inflation target. Further reports that Toshiro Muto is front-runner for the head of the central bank continue to do the rounds and this should be announced in the coming days. USD/JPY looks well supported on dips and interestingly has traded above the 21-day moving average (currently 92.24) for 69 sessions, eclipsing the previous record in December 2005 of 68. Perhaps this is a signal that a correction is imminent, but after providing solid support on January 23, it’s a level we will watch on pullbacks.
The RBA minutes did provide some support to the AUD with AUD/NZD the day’s outperformer, reaching 1.2280 on the back of news that China had quarantined samples of New Zealand milk due to poor quality, although it turns out it was the quality of labeling that was the issue. Some mutterings from the market about protectionist measures, but it’s certainly not what the Kiwi’s wanted to hear before a key milk auction. Still at the margin, while the minutes left the door open for a future cut, there were clues that the RBA is ready to stand put for now. The bank made reference to an improving global economic backdrop, while domestic resource exports were up in December and indicators pointed to an improvement in housing. All-in-all the minutes barely shed any new light from either the Statement of Monetary Policy or prior rates statements, so there is a chance AUD/USD will get squeezed in European trade, but we feel selling rallies at 1.0350 (just under the 38.2% retracement of the 1.0599-1.0227 sell-off and top of the channel) could potentially make sense.
The ASX 200 paid no real attention to the minutes and focused on the raft of corporate earnings. On the whole it was a subdued day on a headline basis, but bottoms-up there have been some sizeable moves with the market keen to punish names like MND and SHL, which are either priced to perfection or losing market share (in the case of Sonic to Primary). Still, the market looks set to close the thirty-fourth trading day on the up and the bulls will take comfort that the biggest down day this year is -0.6%. Tomorrow will be interesting with BHP, ALL, FMG, SWM, TOL and WPL hitting the wires with earnings.
We are also keeping a firm eye on price action on the Shanghai and CSI as the PBOC will start to drain liquidity from the money markets (via 28-day repos) after flooding the markets in the back end of 2012. Recall these measures had a positive effect on the local bourse so in theory could subtract sentiment. Shanghai also had its first land auction of the year of the snake, which according to Morgan Stanley fetched a 77% premium over the floor price. Add this to a spike in housing transactions in recent times and we could see increased fears of tightening by the PBOC ahead of March.
While we have seen some interesting moves in currencies, equities have predictably held firm and despite a mildly positive bias it is hardly ‘shoot the lights out’ time. Keep an eye on the DAX; with the German ZEW confidence numbers due later today it is likely to show improvement. The ZEW will kick off ‘German economic week’ with the PMI (advanced print) and IFO series also due this week. EUR/USD should find buyers on dips above the 50-day moving average at 1.3306, with an aggressive stop just below the uptrend drawn from the November 13 low at 1.3280. With the second LTRO repayment (analysts expecting €130-150 billion) due to be announced on Friday, we feel buying on dips could make sense, despite the risk of Thursday’s €4 billion Spanish bond auction and the weekend Italian election. The Italian MIB (see below) should see increased volatility over the next few days, but while there has been increased talk of a hung parliament, bond investors have shown little caution; Italian ten-year only pushed up two-basis points yesterday. With the index sitting right on trend and pivot support, it will be interesting to see if the bulls will kick in.
Corporate earnings will start to tickle in, and keep an eye on US home builders with the NAHB home builder index likely to print 48 (the highest since May 2006).