Chris Weston, Chief Market Strategist at IG Markets
It’s been a fairly uneventful day in Asia, with markets having priced in a more market-friendly outcome from the Eastern Europe concerns.
Clearly the fact that Vladimir Putin told the world that those expecting Russia to take aim at other regions were misguided was enough to see Russian equities bid, and this in turn gave developed markets a firmer footing from which to climb the so-called wall of worry. Naturally the Western world is sceptical that this is the last we will hear of the situation, especially as Mr Putin said he reserved the right to protect ethnic Russians in East-Ukraine. Still, for now the market is content that this is a political issue and not an economic one.
One of the other interesting developments was Bank of Canada (BoC) Governor Poloz maintaining his dovish stance and hinting at rate cuts in the future. Currency markets are as hard as they have ever been to trade right now and macro traders have been desperate for a more dovish stance from the ECB, BoC or RBA. The ECB could still have to go down the route of being significantly easier, while only recently the RBA has quite rightly moved into the centre of the hawkish/dovish divide. This meant that Mr Poloz’s comments were fairly significant and if you are a fund who trades around central bank policy divergence, you were effectively given a green light to sell the CAD against the G10 space.
AUD/CAD has seen a bit of profit-taking today, but is looking strong and the break and close above the 61.8% retracement of the 14% drop through April to August last year at 1.0125 is certainly positive. A move to 1.0288 and then 1.0353 could be on the cards in the coming weeks. I have also suggested long EUR/CAD trades of late and this is another pair that looks fantastic from a trend-followers perceptive, so I am staying long here; trailing stops to 1.5320.
(Daily chart of EUR/CAD)
Staying with currencies, AUD often has bouts when it has its day in the sun and right now it is looking delicately poised for better days. AUD/USD has broken and closed above the reverse head and shoulders pattern and would be targeting the 0.9500 level based purely off this pattern. In the short-term it needs to close above the March 7 high of 0.9133 and the 200-day moving average 0.9149. The pair has been below the 200-day moving average since April 2013, so this would be a positive development for the pair, although it’s always more positive to see the moving average rising at the time of the break. Certainly the fundamentals don’t suggest a move to 0.9500 should be on the cards anytime soon and we will need to see a marked pick up in positive newsflow from China for the AUD to really move higher.
GBP/AUD looking vulnerable
GBP/AUD especially looks primed for a big move to the downside, having broken and closed below the April 2013 uptrend and neckline of the head and shoulders pattern. The target on this pattern would be 1.71, so Australians looking to join the rest of the world by buying property in London could hold off and get take advantage of a stronger AUD.
Back to today’s trade; we’ve seen some negative flow towards China today with property stocks getting hit fairly hard. We know the pace of house price gains is slowing and property is out of favour as an asset class there, with investors still preferring wealth management products. Talk on the floors has been around a sharp pick up in short positions from the local hedge funds towards property stocks, helped notably by the PBoC not attending the emergency meeting yesterday for a troubled real estate company yesterday. We’ve also seen a reasonable rise today in the repo market, with the seven-day repo rising 50 basis points, although at 3.4% it’s hardly a concern and well-engineered. USD/CNH (offshore yuan) is also extremely close to the 6.20 barrier that many feel could set off fireworks if breached, given the term structures in place.
The ASX likely to track sideways in the short-term
Despite the CSI 300 falling 1.0%, the ASX 200 has held on and it seems the index is really lacking a catalyst. When the market P/E ratio is trading on a premium to the long-run average we need belief that the macro backdrop will be in a good place, so that earnings can grow. That side of the equation is a little murky right now and thus we need to see either a pick in sentiment towards the top down macro backdrop or a pullback in the market for equities to entice the value investors, or we run the risk of sideways price action, which seems the more likely outcome right now.
There certainly isn’t anything too positive coming out of Japan today, so our European markets look set for a flat open. Clearly the focus will be on the BoE minutes and the Fed meeting in late US trade, with Janet Yellen’s press conference shortly after. A taper of $10 billion seems likely, so I would be focusing on the degree that the economic projections are downgraded, the change to the current guidance for increasing the Fed funds rate, whether the Fed look at the recent wage growth data and if there is mention of the improvement in employment and whether this is offset with talk of slack in the labour market.
The Fed have detailed a number of changes recently, so we shouldn’t be surprised by most of the big changes that should be announced. The question is how radical are the changes are? Given price action of late, the market is positioned for a dovish stance.