After last week’s 0.9% decline in the US dollar index, we have seen a slight bias to be long USDs, with traders generally fading EUR/USD and GBP/USD today. Newsflow has been generally supportive, although US futures are relatively flat, despite a stronger Chinese market.
Over the weekend China released its new yuan loans and M2 money supply, with a fall in new loans, while M2 money supply has grown 14.5% in July – 60 basis points above expectations. This increase in credit didn’t really cause too much of an issue, with traders bidding up stocks an hour or so into trade, after the State Council said it was looking to ‘actively’ develop small financial institutions by different means, including a reserve ratio requirement cut. It also wants to lower costs for small companies, thus it seems that it is ultimately looking to limit the activities of the shadow banking committee and therefore needs to provide a cushion to limit the impact of lower credit from these institutions. The CSI 300 is up 2.4%, while the Shanghai Composite is higher by 1.7% and is eyeing the July 11 high of 2092 (the index is currently at 2087).
AUD/USD has traded in a tight range of 0.9217 to 0.9172, although there should be interest to buy a trend break in AUD/CAD if it materialises. The key debate that is going on among traders and investors alike is whether the RBA has finished its easing cycle, and clearly this is an argument which is dividing opinion. We would put the probability of a November cut at 50:50, but a lot is now fully dependant on the upcoming employment reports and more importantly the October 23 CPI print. We know the RBA slightly amended its easing bias to seem less urgent last week, now saying ‘rates will be adjusted as needed’, however with the average standard variable and discounted mortgage rate reaching similar levels seen in the GFC (the average standard variable rate is now 5.95% and discounted mortgage rates at 5.1%) and lending rates to larger businesses – the lowest in some 35 years – the bank is already extremely stimulatory. The current cash rate is also 110 basis points below what many strategists feel is the ‘neutral’ cash rate (3.6% to 4.6%), thus unless the economy deteriorates the RBA should be happy with seeing how things progress. However, we’re sure it would like to see AUD/USD move convincingly into a new 0.8500 to 0.9000 range.
The ASX 200 has had a good day’s trade with the index closing up 1.1%, which will always be well received by the bulls given the ramp up in corporate reports this week. We highlighted the moves in the resource space a number of times, but since late June some of the moves here have been spectacular. Since June 25, the ASX 200 has rallied over 10%, however FMG has put on 49.9%, BHP 21%, AGO 43%, while NCM has gained 37%. Momentum is clearly in the space at present and this is the space to be leveraged too right now.
The Nikkei saw a weak open, with the Q2 GDP print being revised down one percentage point to 2.6% from 3.6%, although buyers have stepped in. The immediate effect was to bid up JPY, with USD/JPY hitting a low of 95.92 before re-claiming the 96 handle. Stops are prevalent in the market below the August 8 low of 95.80 and we would not be surprised to see the market use the 96 level as a platform to move higher in the coming months; a move below 95.80 however should see traders close longs. The trend is lower, so this is one for the brave right now, especially as the weaker GDP print could have implications on the 2014 consumption tax rise. The final GDP print for the second quarter will be released on September and the market fully expects the Abe government to base its final decision on whether to backtrack on the proposed rise in sales tax. Cleary this number will not please, although Prime Minster Shinzo Abe believes the economy is ‘steadily rising’ and we feel the probability of a rise in April 2014 is more likely than not, especially with the IMF recently saying a hike to 10% is an essential step for putting the country’s fiscal position on a sustainable footing. Weak capacity utilisation numbers reported late in the day, also subtracted from sentiment, falling 2.3% in June.
With the Chinese and Hong Kong markets being bid on good volume, European markets should get off to a good start, despite an unchanged read of the S&P 500 futures from the European cash close. Data and earnings reports are light, so traders will probably pay closer attention to macro issues, such as reports the German central bank are expecting Greece to need additional rescue money by 2014 (at the latest), with a Cypriot styled ‘bail-in’ model being adopted. It’s worth therefore keeping an eye on Greek bond yields, which have fallen in from 11.93% in early July to currently sit a 9.72%. We will also get growth forecasts out of France and Germany, with the latter economy likely to grow 0.75% in the second quarter, exceeding the prior estimate of 0.6%. Spot gold has also seen good buying today with the precious metal putting on $15 or over 1%, with traders looking at the potential for increased demand from China given improving sentiment towards the region.