It was a strange open in Asia today, with USD/JPY coming off sharply from its Friday close of 103.21 to hit a low of 101.97. This occurred after the Japanese Economic Minister said the JPY’s excessive strength had been largely ‘corrected’ and any further moves may have negative connotations. The sharp moves south have also been blamed on the 9% spike lower in silver to $20.33, as traders liquidated other asset classes to pay up for margin calls. Throw in some wafer thin liquidity and stops, and you can see how you get a sizeable move like that.
The 90-pip rebound in USD/JPY is testament to the fact that these are not new comments, as well as a strong tape and decent support around 101.85. Like silver, liquidity was poor and the Wellington open can often be a bumpy affair. Buying dips remains the favoured way to play this pair, and the USD will continue to be front and centre this week given the level of Fed members due to speak. Chicago Fed president Charles Evans kicks the proceedings off into the latter stages of today’s US trade, and recall only a couple of weeks ago he suggested the Fed could end purchases outright, rather than simply taper off. James Bullard, Bill Dudley and of course Ben Bernanke speak over the coming days. While the Fed President will no doubt defend his current accommodative policy, the market will scrutinise his every word for signs that the Fed will announce something substantial in either the June or September meetings. Bill Dudley’s speech could also be interesting as he may give clues as to a clear front-runner for Mr Bernanke’s replacement.
The market is already long USDs, with the weekly commitment of traders (COT) report showing USD net-long positions at the highest levels since June. Interestingly, the market now holds net long USD positions against all key currencies, with the exception of NZD and MXN. Given the prospect of dovish rhetoric from the Fed’s core, and positioning from the macro and model community, we could see some lightening up, however this is a strong tape and it’s hard to see the big players putting any structural USD shorts on in the short term.
Asian equities have found strong buyers, with new highs in the Nikkei, while the Hang Sang made a higher high and is honing in on the January highs of 15,356. China, encouragingly has had a positive move despite reports over the weekend that April house prices grew 4.9% on the year, the fastest gains since April 2011. Interestingly, recent reports (source- Nihon Keizai Shimbun) highlight the benefit to Japan’s large exporters from its exchange rate, suggesting that for every one JPY move in USD/JPY, it translates into a $2.7 billion profit, while Toyota themselves has detailed that this same move in the exchange rate positively impacts its profit by $340 million. Currency wars are in full effect and one gets the sense that they have some way to play out!
The ASX 200 couldn’t quite print a higher high, but we’ll take 0.5% gain. It’s been a reasonably risk-on day, with all sectors except telco’s gaining. 57% of stocks have advanced, with 10% of the 200 printing fresh 52-week highs. The 61.8% retracement of the all-time high to GFC low is fast approaching at 5427, and we’d expect some resistance here.
AUD/USD has traded between 0.9791 and 0.9734, although the flows have been largely driven by the USD, given price action in NZD/USD and EUR/USD. The market has swung into a net short position of 13,450 contracts on AUD/USD, and given that was recorded on Tuesday, you’d imagine that would be closer to 20,000 now. Falls in gold and iron ore haven’t helped sentiment and we’d be looking at more compelling levels to get short again. Gold is down by 5% or more year-to-date in every G10 currency now, and like AUD/USD, remains a sell on rallies candidate, with traders eyeing support at $1321, ahead of the 50% retracement of the 2008 to 2011 rally at $1501.
Given the moves in Asian markets, we’d expect a good open for Europe despite US futures being unchanged. New highs should be seen in the DAX, CAC and FTSE, although the FTSE still has to break the 2007 high of 6745 before it makes a move to the 1999 and (all-time high) 6950 (all-time high). Earnings are light today, while data centres on Chicago Fed activity index and Italian industrial orders. Don’t be alarmed by a 168 point fall on the Italian market 280 points come out of fair value due to a number of companies going ex-dividend.