Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Asia is in wait and see mode with traders reluctant to commit to either direction until we get another headline or a bit more clarity on the Ukraine/Russia situation. Given the FX space tends to react first to any change in sentiment, particularly as fresh headlines hit the wires, I feel this is the space to watch at the moment. Early in Asia there were reports suggesting Russia continues to deploy troops to the Crimean region and that Russia gave Ukraine an ultimatum (14:00 AEDT) to surrender Crimea. Despite these reports, nothing has happened as yet and risk sentiment has remained fairly stable in Asia, with traders taking a wait and see approach. At this stage I feel reacting to fresh developments is possibly a better strategy than pre-empting a situation.
Nikkei back in positive territory
The safe-haven trade has somewhat unwound with the yen giving up some of its recent strength. USD/JPY has climbed to 101.68 and helped Japanese equities recover in the process. This level is around where USD/JPY closed on Saturday morning and essentially sees the pair fill the gap created at yesterday’s open. While Japan is enjoying a bit of a recovery, Chinese markets remain choppy with investors focusing on reports the PBoC continues to drain liquidity via reverse repo operations. The impact on the seven-day repo rate has been a 69 basis point jump to 3.59%. Last week the PBoC actually removed liquidity by more than today’s operations, yet the rate still fell. There is also a degree of caution in China today ahead of tomorrow’s commencement of the National People’s Congress. A possible widening of the yuan trading band, deepening reforms and economic targets will be the key focus. The greenback continued to march north against emerging market currencies, particularly against Russia’s ruble, the Turkish lira and South African rand. Not even central bank intervention nor a 150 basis point interest rate hike could save the ruble from sliding. Emerging currencies will be key as the situation unravels and have the power to see sentiment swing either way.
AUD drops on the RBA statement
The AUD has been in focus today and actually managed to rise heading into the RBA rate decision. The gains were driven by building approvals data which came in at +6.8% (versus +0.7% expected) and showed the housing recovery is on track with a whopping 34.6% year-on-year rise. This is one of the few bright spots for the local market at the moment and showed a solid rise in both detached housing (+8.3%) and apartments (+4.6%). A current account deficit of $10.1 billion was in-line with estimates with exports contributing 0.6% to GDP, slightly weaker than the expected 0.7%.
As widely expected, the RBA left rates unchanged and reiterated it expects a period of stability in interest rates. There were only minor changes to the statement with the RBA acknowledging declining resource sector investment. The RBA also put in a line on the AUD being higher than the historical standard and some feel this is a first step towards an easing bias again. The average for AUD/USD since 1990 is 0.7612 and since 2000 is 0.7864.
This saw AUD/USD lose ground after an initial pop higher. Focus now switches to Governor Glenn Stevens appearance at parliament on Friday where he might explore the impact of capex disappointment and risks to the neutral policy bias. Tomorrow we have 4Q GDP numbers which are expected to be up 2.5%, but some analysts feel a weak domestic market might nullify a solid contribution from net exports.
Europe in for a firmer start
Looking ahead to European trade, we are actually calling the major bourses higher today. After a sharp sell-off in Europe yesterday, it is not surprising to see markets pointing towards a bit of a recovery. While attention was pinned on Russia/Ukraine, ECB President Mario Draghi was on the wires talking about the benign inflation and that it is unlikely to return to 2%. Some analysts feel this raises the possibility of a rate cut, but I still feel this is quite far off. Draghi actually balanced out his comment on inflation by saying the economy is moving in the right direction and saying the Ukraine situation will have a limited economic impact on the region.
On the European calendar today we have Spanish unemployment change while in the UK focus will be on construction PMI. Data is light in the US tonight, but perhaps the Senate Banking Committee’s confirmation hearing deserves some attention.