Asia has maintained a bid tone, with sentiment remaining positive given the lower prospect of military intervention in Syria and more good economic numbers out of China. Japan is leading the way today with a 1.3% rise and trading firmly above 14,000 despite the pending sales tax hike issue. It’s all about industrials in Japan as investors pile into construction and materials names in anticipation of an infrastructure lift as Tokyo gets ready to host 2020 Olympics. The construction and materials sector has surged around 5% today, while industrial goods and services are also enjoying this prompted talk of more stimulus flowing into the Japanese economy, and in turn weakening the yen. Mr Abe is likely to make it his mandate to lift infrastructure in time for the Olympics.
Japan is Australia’s second biggest trading partner and we are in a good position to benefit from Japan’s spending as well. This is why many analysts are now looking at AUD/JPY to outperform the majors. AUD/JPY has just broken through 92 and it will be interesting to see if it can finally break resistance in the 92.50 region, the highest level since July. The BoJ minutes released today were a non-event as expected. Focus in the short term is likely to remain on the proposed sales tax hike. USD/JPY is currently sidelined at around 99.60 and could push higher if tapering talk intensifies. Looking at the equities in the rest of the region, the ASX 200 has climbed 0.4%, while the Hang Seng and Shanghai Composite are just over half a per cent stronger.
Staying on the AUD theme, the local currency has continued its near-term rally, with Chinese markets close to get back into bull market territory. As previously stated the AUD is not just a reflection of the Chinese economy, but the global economy is in a purple patch right now and this is a being reflected in the flows. It’s also really positive to see stability in emerging market currencies and this give the AUD an extra kicker in the sense that emerging central banks don’t have to sell AUD/USD to rebuild USD holdings. We have speculated that the November RBA meeting could be a 50:50 outcome, but clearly the market seems to feel this is now an unlikely event.
There has been more China data out today, with fixed asset investment, industrial production and retail sales on the docket. What we saw was further confirmation that China is the least of our problems right now and further evidence that the measures imposed in late June are keeping the economy growing a descent pace and clearly given the outflows of emerging markets this is an area were capital is likely to gravitate too, as opposed to exiting like we have seen in recent times in Indonesia or India. A 13.4% increase in retail sales was really strong and good news in some ways for a country trying to rebalance. Industrial production and fixed asset investment was also strong and clearly plays into a robust Q3 GDP print on October 18. Locally Jobs numbers on Thursday will be the key event for the AUD, with analysts expecting to see another poor reading with the unemployment rate ticking up to 5.8% – another four-year high. However, improving global macroeconomic dynamics should be enough to encourage investors in the near term.
As a result of today’s data AUD/USD is holding its ground above 0.9250 (0.9290 today’s high) as it becomes clearer that the global economy is in a better place. Locally we had NAB business confidence, which showed the strongest reading since May 2011 although this was offset by a poor business conditions report and kept the AUD bulls contained. We continue to feel the pair has breached key resistance levels and the current momentum is likely to take it back above 0.93 and potentially up to the head and shoulders pattern we highlighted yesterday.
(AUD/USD short term uptrend)
After a mixed performance yesterday on some profit taking, European markets are facing a firmer open today. While there aren’t any major economic releases due out of Europe today, there are a few developing stories to keep an eye on. Italy’s senate is set to vote on expelling former PM Berlusconi from politics, which could renew some political concerns and thus we will be watching the Italian bond market for any signs of stress.
EUR/USD was one of the best performing FX pairs and continued its recovery after a sharp reversal from lows in the 1.31 region. It ran up to a high of 1.3273 in the absence of any key data from the region. Later today we only have French industrial production due out, but we feel the overall risk tone will set the pace for the single currency. While risk look upbeat at the moment, there is a lingering Syria issue which threatens to derail the recovery should the current status change. Latest reports suggest US leaders are considering halting any air strikes should Syria comply with a Russian proposal to relinquish control of its chemical weapons. Although tapering talk has continued, the US dollar index is actually threatening to break an uptrend which has been in place since August. There is no major economic data out of the US today.
(US dollar threatening to break uptrend support)
The local market just held its head above the 5200 level, taking solace from the gains in Asian markets. Clearly a tilt at the May 15 high of 5249 looks on the cards and traders seem pretty happy with the macro influences right now. It’s all about resource names at the moment, with China and Japan driving sentiment. Following recent gains, a number of resource stocks are knocking on key resistance levels, with BHP near $36, FMG at $4.50 and RIO pushing through $62.50.