Asian markets are mostly weaker as investors remain cautious around QE and volatility in Japan. The Nikkei is around 0.6% weaker and the Hang Seng has dropped 1%. Moves in the currency space are heating up now, with some key support levels being tested. AUD/USD has gone another leg lower in Asia as traders reacted to a disappointing trade balance reading. Australia’s trade balance came in at just $0.03 billion versus estimates of around $0.2 billion. As we highlighted yesterday, the underlying fundamentals of the AUD are weak at the moment, and any strength is likely to be used as an opportunity to sell by traders. The pair has printed a low of $0.9442 in Asia in yet another sign that confidence in the AUD has been lost.
The AUD is not only losing ground against the greenback, it is also trending lower against the sterling and the euro. We are now staring at the AUD/USD low from October 2011 of $0.9388, and this is likely to be a near-term target for traders. This level is also the high from November 2009 and April 2010. While the easier trade is to wait and sell the pair on rallies, some aggressive traders would no doubt be looking at a momentum play. The next key data for the AUD will be China trade balance on Saturday.
Japan opened lower today and managed to pop higher at some stage before the selling resumed. There is clearly a long way to go before we start to see some stability in Japan. USD/JPY retested 98.86, which was also the low on Tuesday and managed to find some support there. Whether the pair can continue to hold remains debatable and perhaps unemployment claims data later today will be the key event for the pair. While support is at 98.86, near-term resistance for the pair is in the 100.4 region.
Europe will be on central bank watch later today, and this is likely to be the key focus for the investment world. We are currently calling European markets flat to mildly weaker at the open. EUR/USD managed to ignore all the noise and held its ground above $1.30. The pair actually enjoyed a temporary spike to $1.317 on some positioning ahead of the ECB, only to drop back below $1.31. Only two economists are calling for a rate cut of 25 basis points, so there is a still a possibility of a cut, which would see the EUR under heavy selling pressure. Our view is the bank will hold off from cutting as some of the data of late has improved, but the bank could look to curb EUR strength by mentioning it could still impose negative deposit rates. Comments around growth for the region could also be a source of volatility. We might finally see EUR/USD break out of its current range between $1.30 and $1.31.
The BoE will also be in focus today, particularly with GBP/USD having been well bid this week. A much better-than-expected services PMI (54.9 versus 53.1 consensus) set the tone for GBP/USD to push higher yesterday, and the pair managed to test $1.54. The real action with regard to sterling comes when Mark Carney comes on as the BoE governor in July, thus we feel this will probably be a non-event. We are seeing a near-term uptrend being established and the pair has enjoyed a steady rise since bottoming at $1.50 at the end of May. Any pullbacks into this uptrend support are likely to be used as an opportunity to buy.
The local market had a poor start to the session today, dropping to a low of 4778, which effectively meant we are down 9% from the May 15 high of 5250. We have since come off these lows (currently down 0.6% at 4805), with the banks largely responsible for the gyrations. We feel the price action in the banks was driven by bargain hunters entering the market on hopes of a near-term bounce. The yield appeal improves on the back of lower share prices. Valuations for some of these yield plays had been looking stretched for a while, and this is probably a healthy pullback for value investors out there.
The fact that domestic data continues to deteriorate vastly is also driving the probability of a rate cut higher (now at 42%). This seems to be lending some support to the market, but not enough to drive equities into positive territory. Looking at the big banks, NAB has tacked on 0.3% while CBA, ANZ and WBC are mildly weaker. In the mining space, the downgrades are really starting to weigh on Newcrest Mining as the stock drops another 6% today to its lowest level since June 2005. Out of the analysts covering NCM, 41% have a buy rating on it, 29% hold and 29% sell. The average 12 month price target is $18.66.