We’ve seen a relatively lively start to the week in Asia, although many in the market were keen to see the China data dump before putting new money to work.
The G7 meeting has given more life to short the JPY trade, but then to be fair we didn’t really expect too much. USD/JPY has kicked onto 102.15, helped by a three basis-point move in US yields, with the ten-year now trading at 1.92%. We continue to be bullish on the pair and will continue to look to buy pullbacks continues. Support is now seen at the 23.6% retracement of the 97.01 to 102.15 move at 100.94 and below that the 38.2% retracement at 100.19, with the top of the monthly cloud at 100.23.
Much attention has been made paid to the USD over the last few days, although we still feel that hawkish comments from Charles Plosser and Richard Fischer should be taken with a pinch of salt and are hardly thematic of what the core are thinking. We will hear more from the Fed this week with Ben Bernanke speaking on Friday (US trade), while Fed members Gibson, Plosser, Rosengren, Fisher, Raskin, Williams and Kocherlakota also speak.
It will be interesting to see how US traders react to the much-anticipated Jon Hilsenrath (WSJ) article titled ‘Fed maps exit from stimulus’. While the article didn’t suggest the Fed was ready to cut back on the pace of bond-buying anytime soon, it did portray that it had detailed a strategy for when it does. To us, this simply highlights that like the ECB, the future of its asset purchase programme is data-dependant. We already know that payrolls are OK and running above the influential Fed member Charles Evans’ target of 200,000 over a six-month average. However, inflation is key now and any signs that we can push up from the current low levels on core PCE (the Fed’s preferred measure of inflation)should support the USD. Core CPI is out this week and likely to print +1.8% year-on-year; a number north of this should create further USD inflows.
Gold has continued to come off as the USD found buyers today with another $11 falling from the spot price. Clearly $1487 (the 61.8% retracement of the $1590 to $1321 sell-off) proved to be huge resistance, and the bulls will be hoping the Fed doves can swing the argument back into the ‘stimulus for longer’ camp or they will be faced with a break of the key $1424 level, which could see the metal below $1400 again.
AUD/USD found sellers on the open, hitting a low of 0.9966 and testing Friday’s low of 0.9961, despite a 5.2% increase in March home loans. Tomorrow’s budget could be the next bearish catalyst, with the market expecting a deficit of around 1% of GDP or A$15 billion. Of course the high AUD will take most of the criticism, and perhaps that will change going forward because the AUD is looking vulnerably against a whole host of G10 currencies right now; namely AUD/USD, GBP/AUD, EUR/AUD and AUD/NZD. Downside should be limited to 0.9860/70 though (the 200-week moving average and October 2011 uptrend).
In the equity space, the Nikkei is the standout again, while the ASX 200 closed up a modest 0.1%. The interesting concept in Australia is traders predictably looking to leverage themselves to names that do well in a falling AUD environment. Names like RMD, CSL, WDC and NWS have found solid buying and it appears that a number of equity traders are using equities as a hedging tools. Growth has taken a backseat, and perhaps this should be a longer-term issue for the bulls as this could be a good insight into market thinking on future Fed actions, although you would have thought the falling AUD/USD would provide more support for export names.
The Nikkei is up 1.2% and at new highs, despite a sizeable sell-off in the JGB market, with ten-year treasuries gaining nice basis points (bp) to 78bp. We were encouraged by some the Japanese data of late, and even more so by Friday’s news that Japanese investors are buying foreign bonds again, notably the life insurance companies. This, along with rising inflation expectations are key for USD/JPY to push higher over the medium term.
China ‘s April data dump was a slight disappointment and while the numbers themselves were strong on an absolute basis, we need to remember we are comparing them to expectations. Fixed asset investment gained 20.6% on the year (versus expectations of 21%), while retail sales grew 12.8% and industrial production gained 9.4%. The Chinese market has fallen on the back of the report, however at least it removes loose concerns of near-term tightening. Keep an eye on copper through European trade, while tomorrows iron ore fix will also be interesting.
US futures have fallen modestly today, assisted on one hand by a strong Japanese market, yet sold on the concerns of an early exit from the Fed. In upcoming trade US retail sales are the key release with the market expecting a 0.3% decline in April, and this print is always going to be important as it highlights the health of the consumer and the potential to feed into expectations of inflation and also potential job creation. Keep an eye on 1643 on the S&P 500 (the top of the rising channel), where the index may struggle in the short-term, especially with the increased discussion around changing Fed policy.