Asia has been pinned on China CPI data today which resulted in some moves in the risk currency space. CPI remained steady at 2.5% year-on-year (yoy) while the market was expecting it to fall to 2.4% yoy. Given the general trend is usually a spike in inflation heading into the Chinese New Year, some analysts were already expecting to see a better-than-expected reading.
AUD/USD has been quite volatile this week, with an initial spike on Tuesday followed by a sharp drop yesterday and now we have seen the pair reclaim the 0.90 handle on the back of the China data. The pair printed a high of 0.903 and continues to hold its ground above 0.90. RBA Assistant Governor Kent was speaking this morning and mildly talked down the AUD, but this didn’t have much of an impact at all. Should the 0.90 level be breached then I would be eyeing a move back towards January highs (0.908).
This data out of China, to an extent, hit a sweet spot. Firstly it shows price growth is tracking at a steady pace while at the same time subdued enough to leave the PBoC capacity to act if needed. China has been concerned about the pace of credit growth but at the same time the PBoC has pledged to use a variety of tools to manage liquidity, including the reserve-requirement ratio, open market operations and short-term lending facility. This gives them ample room to act if liquidity becomes a problem again. Today we saw a decent drop in China’s interbank rates and this is helping to support equities.
USD weakness sets the tone for gold
Taking a closer look at the equities in the region, it has been a mixed session with China firmer, the Nikkei declining and the ASX 200 has surged. Japan has slumped around 1.7% from its highs early in the session in a move triggered by a USD/JPY drop below 102. Given the USD had struggled in US trade, USD/JPY had held up surprisingly well and perhaps it is now playing catch-up to USD weakness. Staying on the US dollar theme, gold has been on a tear and has remained bid in Asia today. US dollar weakness has been the primary driver of gold strength as US economic data goes through a rough patch.
Gold has held its ground above 1300 in Asia and is now knocking on the 1308 level which is the 50% retracement of the drop from August 2013 highs (1434) to January lows (1183). It will be interesting to see if the precious metal has enough momentum to carry it through this level. Essentially there will continue to be questions around tapering and whether or not the recent poor run in data will have any impact on the tapering path. Given recent comments by Janet Yellen and other Fed members, it doesn’t seem like the Fed will be deterred from this path. Next week will help shed further light on the situation with the release of the minutes from the January meeting.
Given the decision to taper was unanimous, perhaps the minutes will shed some light on the overwhelming vote. On the Fedspeak side we have Lockhart, Williams and Bullard set to speak next week. Later today investors will be eyeing US industrial production, consumer sentiment and inflation expectations data.
(Gold testing 50% retracement)
Europe eyeing growth
Looking ahead to the European open, we are calling the major bourses relatively mixed with GDP numbers being the main theme. We have Q4 GDP for Germany, France and Italy while we also get GDP for the region along with trade balance numbers.
ASX 200 rallies despite mixed earnings
The Australian market has had an astonishing week, with a whopping 3.7% gain heading into the weekend. Reporting season has ramped up with some mixed reactions for reporting companies. Rio Tinto and Newcrest Mining traded higher earlier in the session but have since given up gains on some profit-taking.
Sims Metal has been a standout, surging over 5% after finally posting a series of losses. The market even ignored the fact SGM will not pay an interim dividend and focused on some positive commentary on outlook. There is a big dividend coming out of the market on Monday (12.2) including $1.83 for CBA. This has perhaps seen some positioning on selected stocks as some investors rush in to receive the dividend before the ex-div date.