Welcome to our new daily closing post on the ASX and boarder markets from Chris Weston at IG Markets. This will be a daily feature to accompany Chris Becker’s (The Prince) epic “Trading Week”. Enjoy!
It seems that European markets will see another tepid open, although traders will have to be alert and prepared to be nimble given the number of key personnel ready to hit the wires in upcoming trade. Perhaps the key economic release will be UK January CPI/RPI, with the former expected to print a fourth month in a row at 2.7%. The BOE will release its quarterly inflation report as well. Keep an eye on GBP/USD on a miss of consensus, with the pair looking like it wants to break the February 5 low of 1.5631, while a weekly close (see chart) below 1.5645 would be even more bearish and should continue to assist the FTSE. With EUR/JPY finding buyers throughout Asia, long FTSE/short DAX seems to be a good index derivative of the forex market.
GBP/USD weekly chart:
Asia has thrown up some interesting moves with headlines that North Korea has been conducting nuclear tests to the slight expense of the Kospi and KRW (won), while at the same time the JPY juggernaut has once again found itself at the centre of attention.
The Nikkei re-opened after being offline yesterday and clearly took heart from Finance Minister Akira Amari’s comments that the Japanese market will rise to 13,000 by March.
With Q4 GDP expected to grow 0.4% later this week, after contracting a massive 3.5% in Q3, clearly the Japanese government is enjoying the strong positive feedback loop between loose monetary policy, asset prices and subsequent improving economics.
Comments from US Treasury member Lael Brainard that the US supports Japan’s efforts to boost growth gave investors another green light to sell the yen and USD/JPY rallied to 94.46, the highest level since May 2010.
Perhaps these actions will infuriate France, which is showing increasing concern about currency devaluations. However with the US and Germany (after comments from Jens Weidman and Wolfgang Schaeuble yesterday) showing a lack of concern, it seems the upcoming G20 will go ahead quite smoothly, with Cyprus (and horsemeat) the more pressing issue. Besides, have the Japanese even done anything yet? All we’ve really seen is a lot of promises and rhetoric of future action!
The Nikkei however looks set to test the recent high of 11498, and we just can’t get bearish USD/JPY, even though rate differentials and other fundamental drivers suggest the yen should be higher. If you’re a hedge fund it is still dangerous to get aggressively short, given the likely barrage of headline risk ahead of the change of BoJ leadership and upper house elections in July. The path of least resistance for the Nikkei is higher (in our minds).
The ASX 200 continues to tread water ahead of the April 2011 high and 50% retracement of the all-time high to GFC low at 4986, and consolidation seems to be the name of the game. Like the FTSE and Nikkei, the Australian index could benefit from a domestic currency that looks shaky. Earnings from heavyweights CSL and CBA tomorrow could rock the boat though, especially with CBA setting precedents for the rest of the banking space. Buying pullbacks to the November 16 uptrend at 4878 could possibly be the way to go.
US futures have barely reacted to the Korea/Japan moves and thus our open calls for Europe have hardly moved. This may change as traders focus on speeches from Fed members George, Lockhart, Plosser and Lacker throughout European and US trade. We still feel some of the recent forward-looking narrative from Chicago President Charles Evans will be key going forward, especially on his views around linking employment not just to the Fed funds rate, but an end of QE.
However as we go into the June FOMC meeting (a meeting we feel will be pivotal for the USD) comments from other members will shape expectations ahead of this.
Mario Draghi will also speak in Madrid, while earnings from Coca-Cola, Barclays and L’Oreal will be in focus. Barclays seems to be lacking a bit of a catalyst after trading in a range of ₤2.85-₤3.07 since mid-January. Valuations are still cheap on 6.6x and 0.8x TNAV (net asset value), so perhaps the result could be the spark to attract buyers.