Courtesy of Chris Weston at IG Markets:
There has been a gentleman-style agreement in place for some time that central banks should not specifically use monetary policy to directly invoke a weaker currency, and despite the bout of aggressive rhetoric it seems that Japan has been given the green light to continue its inadvertent depreciation. The G20 was perhaps a little tougher than some had positioned for, but the group held back from actually singling out Japan, and to be fair the statement was pretty vague and this has helped push USD/JPY to 94.22 in Asia. Comments from Prime Minister Shinzo Abe also helping the long Nikkei/short JPY trade after he gave clear hints today that the government was looking at buying foreign bonds and other measures to boost the domestic stock market.
The market is now firmly assessing who will get the posting for the BoJ top job. While local speculation on Friday put the more conservative Toshiro Muto as favourite (which is interesting given the lack of JPY strength we have seen after the speculation), it’s worth remembering that the buck stops with Prime Minister Shinzo Abe. After his comments today on foreign bond buying (something Muto is against), perhaps the more radical (thus JPY negative) Kazumasa Iwata or Haruhiko Kuroda are still in the running. We expect to hear a firm decision ahead of Mr Abe’s visit to the US to meet President Barack Obama on February 22, but both USD/JPY and the Japanese market will be in play and thrown around by headline risk up until clarity prevails on this issue. The Nikkei is up 2.0% today, but looks disappointingly like it will fail to close above the April 2010 pivot high of 11408, while continuing to pull away from the 38.2% retracement of the 62% fall during 2007/08. There is no reason to go against this trend, all signs point to further gains with Japanese investors who have been selling out of low risk bond investment looking for 12,000 at a minimum.
The ASX 200 has also continued to march higher and like the Nikkei, picking tops in the index is for the brave, especially after last week’s close above the 2010 high of 5025. Financial names are once again putting in the bulk of the points, helped by good numbers from Bendigo Bank, while solid earnings and cash flow from Amcor aided the industrial space. Boart Longyear was dealt a less positive hand by the market after seeing red flags around its balance sheet after net debt increased 122%.
US futures have barely moved despite the strength seen in certain Asian markets, clearly a function of an early close (3.30am AEST) for tonight’s US public holiday, but also we are seeing emerging divergence between many of the key global bourses. Our European out-of hours calls have therefore seen little client action and thus with limited catalysts a flat open is expected. There is a huge amount of event risk to key off this week globally, although perhaps the Italian election over the coming weekend is going to be the main macro risk traders position themselves around. EUR/USD has been offered today and whether there is an element of traders looking to hedge their election risk exposure the issue could get more traction as the week goes on; Keep an eye on Italian 10-year bonds as a guide for the currency. The FOMC minutes mid-week could also spur USD buying if the market hears a more hawkish extension of the previous narrative, where they said ‘several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013’. Despite Fed member Janet Yellen’s recent dovish comments, we feel the market is better positioned ahead of these minutes and we’d be surprised to see as strong a USD reaction as we did in the last set of minutes.
So while many in the currency markets have been moving flows around on the perception of how the G20 statement may limit future policy, the other interesting dynamic is the huge liquidations of gold funds. Given the lack of any yield on offer and the subsequent missed opportunity costs, investors have looked elsewhere. There is also a real sense that inflation is not going to be a major issue despite the vast amounts of devaluation that is taking place (either directly or not) and this was seen front and centre on Friday with a handful of key note investors liquidating a sizeable chunk of their portfolio’s.
Keep an eye on US ten-year yields, where there is an increasingly strong inverse correlation with precious metals in recent months, while further liquidations of gold should also help EUR/CHF move higher on the same thematic of unwinding safe-havens.
We would look to sell gold on rallies to $1664 (the former May 2012 uptrend), but with momentum and trend indicators heading lower, the path of least resistance is down and we target $1530 over time, although the August 15 low of $1590 could find buyers ahead of this level. Australian gold stocks have been hammered today, so it’s logical to think the same will happen to European names.
Apart from the strong moves in gold names, there isn’t too much to key off today with limited corporate reporting or economic data. Interestingly, we feel GBP/USD is looking more and like it wants to head to 1.50 over time, notably after the 2010 trend break last week, and we have already seen a decent outperformance of the FTSE. We feel long FTSE/short DAX could potentially continue working, especially if EUR/USD keeps finding good buyers on dips.
