Asia has come to life today with some solid gains across the board in a move that seems like a relief rally after a long period of underperformance. While the US trading session was somewhat lacklustre, there has certainly been plenty of action in Asian trade. Australia has been among the leaders, rising significantly after having dropped around 5% from its January highs. While equities have enjoyed a bounce, the AUD has stolen the show after a raft of data came in fairly strong. Trade balance data showed a $468 million surplus when the market was expecting a $200 million deficit.
The headline retail sales reading was in-line with estimates at 0.5%, while NAB business confidence also showed a sharp improvement to 8. This data saw the AUD squeeze even higher, nudging through this week’s highs against the greenback and coming within striking distance of the 0.90 mark. This move higher was seen across other AUD crosses like AUD/JPY and AUD/EUR.
Emerging market currencies rise
There has also been some activity on the emerging markets front, which started with Moody’s upgrading its rating. This saw its bond yields fall and underpinned the Mexican peso towards the end of US trade. There was a sharp drop in USD/MXN at the time of the announcement but there hasn’t been much movement in the pair since then.
Other emerging currencies such as the South African rand and Turkish lira managed to edge higher on the announcement as well. This set risk on the right course heading into Asian trade where we received Taiwan CPI and still have the Philippines central bank decision and Thailand consumer confidence due out. No change is expected from the Phillipines but following recent surprises for India, Turkey and South Africa; there is always a chance they will follow suit to cover themselves.
No change expected from ECB
Focus shifts to central bank activity with the ECB and BoE being the highlights. As it stands we are calling the major European bourses firmer as they play catch up to the positive momentum we are seeing in Asian trade.
While no change is expected from the ECB nor the BoE, the former seems like it’ll be the more interesting of the two. Fears of disinflation have been rampant ever since the softer German CPI reading in January. This makes the press conference particularly interesting as the market wants to see some form of action in Europe. Perhaps some unconventional measures to lift the region’s economy might be explored in detail.
AUD/EUR is one pair I’m watching closely at the moment given the activity coming up in Europe and the emerging market space. The pair is just testing its January highs and given near-term fundamentals for the AUD and EUR seem to be diverging, there is potential for a short-term squeeze through 0.67.
On the AUD front, this week has seen the AUD switch to a neutral bias and today’s positive data added pressure to the upside. Tomorrow we have the RBA’s statement of monetary policy which could come with some upgrades to inflation forecasts. This could see the AUD extend its gains and encourage fresh buying. The AUD will also be watching emerging market activity closely of which a continued improvement would be positive for risk. China’s week long break ends today and market there will have a lot to catch up to when they return to trade tomorrow.
US data ramping up
On the US front, we are now in the business end of the week with data set to ramp up heading into the non-farm payrolls. Later today we have unemployment claims and trade balance data due out along with productivity and unit labour costs data. Should we continue to see negative signs from the data, this could weigh on the S&P in the near term.
With most Fed members feeling that tapering will remain on the current course, then we really need to see some positive readings support sentiment. Fed member Daniel Terullo is set to testify on Financial Stability and we might hear some commentary on QE tapering. Twitter shares will also be in focus after a sharp drop in after-hours trade following its results. The initial reaction is likely to be more pressure to the downside on the back of slower user growth and a wider-than-expected net loss.