Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Asia is mostly firmer with China leading the way in Asia in a relatively quiet day of trade. Materials are leading the Shanghai Composite higher while tech stocks are outperforming on the Hang Seng. Recent guidelines for the healthy development of capital markets issued by the State Council of China over the weekend are most likely the driving force behind today’s gains. China is looking to open up capital markets further which would ultimately see an increase in both inward and outward investment.
With China looking like it is serious about comprehensive capital market reforms, cyclical stocks rallied, particularly in the materials space. The ASX 200 hasn’t done much at all today and is just oscillating around breakeven, with weakness in the resource names being the dominant theme.
Yen weakens on current account deficit
Surprisingly, the Nikkei remains quite choppy despite some strength in USD/JPY today. Japan’s current account deficit came in worse than expected, resulting in some yen weakness which saw USD/JPY nudge through the 102 level. The pair is just hanging around that level at the moment and I suspect traders are just not confident enough to push the USD higher than it already is. Sharp drops in the euro and pound at the end of last week saw the US dollar index (DXY) reverse higher and now it is within striking distance of the 80 mark. This 80 mark is a key resistance level for the DXY.
This rise in the DXY could also explain the drop in gold early in Asia today. The precious metal dropped to 1,280 but has since recovered some ground as the Ukraine remains a source of concern. There was huge turn up to the referendum vote with an overwhelming number in favour of self-rule for eastern Ukraine. This could lead to further problems in coming weeks as Ukraine prepares for May 25 presidential elections. Perhaps today’s weakness will be taken advantage of by some of the gold bulls out there.
AUD focuses on the budget
The AUD will be one of the more widely watched currencies over the next few days, with pre and post-budget trading being the dominant theme. AUD/USD has been holding up incredibly well considering the recent commodities slump, particularly iron ore, and of course the potential for fiscal tightening in the budget forcing the RBA’s to remain accommodative. With fiscal policy likely to be tightened by around a quarter percent of GDP, many analysts now feel we won’t see any rate changes for the rest of the year. Deutsche Bank actually feels 2014 and 2015 will pass with no change in rates.
Meanwhile China is adapting to a new normal in a slower pace of economic growth and this might continue to have a devastating impact on commodities. Already iron ore has dropped quite heavily and could be testing 100 as early as this week. Iron ore was last under 100 back in September 2012. Japan’s March current account figures today showed Japanese investors have been strong net buyers of AUD assets. There has been strong interest in Australian bonds recently and the local government is likely to continue using this as a good funding mechanism.
Europe pointing higher
Looking ahead to European trade, the major bourses are pointing higher. After a big slide on Friday, the single currency has been sidelined against the greenback in Asia. However, the technical setup looks quite bearish considering a key uptrend support line has been broken now. The uptrend line had been in place since July 2013 and came in at around 1.38. This break lower opens it up for further losses in the near term and given Draghi also commented on the strength of the exchange rate, gains are likely to continue being capped in the near term. While data is limited out of the eurozone today, ECB members Nowotny and Constancio will be on the wires and any comments on June easing could be a source of volatility. Traders will also remain on Ukraine watch in light of the recent developments.