ASX at the close

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The main game in town has been the JPY, and of course USD/JPY has been at the centre of that, however today it’s all about AUD/USD and the break of the double-top at 1.05. Whether it can close above here will possibly be down to the FOMC minutes and more narrative from Fed members Richard Fisher and Dennis Lockhart.

Australian consumer confidence was woeful, falling 5.1%, however this did little to detour the Aussie bulls and the pair was largely unaffected. Clearly the Chinese trade balance numbers at a deficit of CNY880 million were the more significant catalyst given they coincided with the spike in AUD/USD through the overnight high and onto 1.0517. A 14.1% increase in imports seemingly caused the deficit, but we need to remember that Lunar New Year fell on January 23 last year, thus if you look at the February 2012 trade balance it came in at a massive CNY32 billion deficit. This year it fell on February 10, thus weakness in this headline number was evident for all to see and seasonal factors were again a major influence. Still such a big import number at this time of year is most welcoming for AUD bulls.

The key will now be at what stage does the RBA start really talking down the local unit, especially given recent commentary from Philip Lowe and John Edward where it seems the economy has handled the strength pretty well. In today’s session we heard from RBA Assistant Governor Christopher Kent, who was a touch more hard-lined and suggested the A$ was clearly weighing on growth; however the significant rate cuts already enacted have further to play out. Interesting comments, but nothing we haven’t heard before from the bank.

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AUD/NZD also looks interesting, having bounced exactly off the 76.4% retracement of the February to March rally. Perhaps the pair can stage a short-term advance from here, although we feel this would represent a longer-term selling opportunity as it’s clear that New Zealand has a housing problem and rates will have to go up, and that will be well before any other central bank in the G10.

Chinese equities are marginally with the Shanghai Composite down 0.3%. However, the same can’t be said for Australian equities which are continuing where they left off yesterday, with some visible rotation taking place amount the sectors. Prior to today’s open, the Aussie market was up 7%, however the materials space (largely dominated of course by BHP) was down nearly 10%. As we pointed out earlier in the week, it had more than 50% of its constituents on a single earnings multiple. With the materials space up nearly 2% today, it seems this is being funded by some portfolio adjustment, with money managers closing positions in healthcare, staples and financials. As we said yesterday, whether this is a liquidity, valuation or a pricing out of near-term tightening in China is unclear, however it seems the culmination of all these factors, short interest and unloved conditions have resulted in more positive price action.

There were also some interesting comments from BHP’s CFO Graham Kerr, which we thought were worth highlighting when he suggested China’s growth would trend down towards 6% after two years. This probably won’t surprise too many out there given its focus on the quality of its growth, but of course in this environment it’s about cost cuts and the miner also detailed it had made $944 million in savings in the six months to December.

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The Japanese equity juggernaut had a more subdued session today, putting on a more modest 0.7%. It seems the JPY bears (of which we firmly belong) are taking a breather today, and while some consolidation can’t be ruled out we still sit in the camp that dips in USD/JPY and the crosses will be bought. After all, since last Thursday when the BoJ announced it was targeting the monetary base, the biggest pullback in USD/JPY has been 143 pips. You have to be nimble when buying dips it seems.

Despite a flat open in the UK, It looks as though we will see another positive open for the rest of Europe, although the eyes on the market will fall on industrial production numbers out of France, Italy and Spain. Both are expected to decline in February, thus a beat could increase sentiment towards equities and EUR/USD which will need to push through the 38.2% retracement of the February to March fall at 1.3115. There is also converged resistance between 1.3148 and 1.3172 (representing the 55- and 100-day moving averages and September 2012 highs). A break here would see 1.3342 come into play; a level we feel would represent a good longer-term shorting opportunity.

In fixed-income land, Germany will tap the market for €5 billion in three-year bunds, while the US treasury will look for a better showing than yesterday’s three-year auction, when it auctions $21 billion in ten-year notes. It will be interesting to see if there is improved demand to hold longer-term paper, and whether there is a pick-up in foreign demand as well.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.