Asia has found buying support today with the Nikkei coming nicely off its lows despite a three basis-point move to the upside in the ten-year bond. The index has even threatened a key day reversal, having traded below Monday’s low, although it still needs to close above Monday’s high of 14,381. However, the bulls will take the rejection of last week’s pivot low of 13,981 as a positive sign.
USD/JPY saw strong buying in early Asian trade, spiking to 102.06, which in turn caused USD upside in EUR/USD and AUD/USD, with AUD/USD trading to 0.9597, testing Thursday’s low of 0.9594. There still seems to be a large amount of confusion, not just among the BoJ, but ultimately the market, on whether the BoJ is trying to engineer lower yields through its bond-buying programme, or higher yields, which of course would be driven by inflation expectations and nominal GDP, or create negative real bond yields. It seems that until this point is made completely clear, then confusion will hold the equity market back from resuming its trend. Interestingly, Koichi Hamada, who is an advisor to the Abe government, detailed that he didn’t think the three-day plunge reflected fundamentals. We’d argue that the 85% rally to 15,942 probably didn’t either!
The ASX 200 has pushed up a modest 0.2%, helped by Japanese equity strength, while US futures have also crept up 0.3% after re-opening. The Aussie index has fallen five consecutive days in a row, which is the longest losing streak since early 2011, and some of the key names have recently been sold off heavily, with WBC 14.5%, ANZ 12.7%, BOQ 11.5%, MYR 25%, DJS 18.6%, TLS 4% falling from their recent highs. The AUD/USD trade looks a little overdone to us, and we’d look to take shorts off the table with a view to re-establish on a daily close below last year’s low of 0.9582 or a rally above 0.9800. However, in the short-term the pair looks to have priced in a lot of bad news, especially with an article in a local publication that the ‘Australian economy is heading for a potentially catastrophic collapse’, highlighting the negative news flow, while positioning is also short.
EUR/USD continues to oscillate around the 1.29 handle and should to trade in a 1.28 to 1.30 range, but EUR/AUD is the place to be if you’re a momentum trader. The pair has rallied 9.77% since April 3 and pullbacks along the way have been shallow to say the least; we would look to tighten stops to 1.3150 if long, as the pair looks overbought at current levels though. This is a pair (similar to GBP/AUD) that when it trends it can run hard, and is a trend-followers dream. To highlight how this pair can trend, from 2008 to 2012 the pair lost 45% of its value, falling from 2.1100 to 1.1605 and we would not be surprised to see further upside in the coming months, although not to this extent. It seems negative deposit rates in Europe are a long way away (as per overnight comments from Joerg Asmussen), while credit demand seems to picking up in core Europe. This is at a time when banks are happy to pay back the €1 trillion borrowed during the two LTRO (long-term refinancing operations) operations, which is aiding the ECB’s balance sheet. In upcoming trade we get further narrative from Joerg Asmussen and Herman Van Rompuy, while German CPI will also be in focus.
EUR/GBP looks good from a fundamental perceptive and we feel traders could look to buy at spot (0.8552), with potential stop at 0.8450, targeting 0.8700. The ECB will continue to talk down the single currency, however we don’t see another rate cut in June and we feel sterling should weaken into July 1 and Mark Carney’s appointment.
European markets should see another good day’s trade on the open, and it seems momentum is on their side after markets like the DAX closed on its high. US futures have pushed up modestly through trade, and if these markets were to open now we’d expect a gain of 0.5%. However, while earnings focus solely on Tiffany, economic data comes in the form of Case-Shiller house price index, consumer confidence and regional manufacturing prints from the Richmond and Dallas. The consumer confidence print is expected to improve to 71 and good numbers once again could see the USD and US stock market rally in tandem. Eric Rosengren (a current voter) also speaks at 03:00 AEST, and recall he spoke only a couple of weeks ago, expressing concern on inflation and advocating increased bond-buying if needed. Of course this week’s US core PCE will be key and the market is expecting the Fed’s preferred inflation read to drop to 1%, significantly below its 2.5% target.