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In recent times that focus has been the JPY and of course the AUD, notable when AUD/USD fell 16.4% during April to August (14.3% on a trade-weighted basis). It seems the AUD is once again the talk of traders, however despite some very promising moves of late, it’s hard to say this is the start of a long-running trend and thus we feel there will be a time to short the AUD again, but that time is probably not now.
Global growth is firmly in the markets’ crosshairs and despite a $4.6 billion widening in the US trade balance yesterday, on a positive note the Fed’s Beige Book continues to show ‘modest to moderate’ growth (thematic of September tapering), while car sales (both domestic and exports) pushed to the highest levels seen since 2007. You can throw in more stellar economic data out of the UK in the shape of the August services PMI and you can see why equities were generally bid in the US. It is certainly a reason why the macro community has also had to do a large about-turn in its AUD view, with traders recently closing out different bearish macro strategies around developed market growth and more so the Chinese economy.
Has the AUD reclaimed its status as the markets’ proxy of global growth? Perhaps. It’s been the proxy of the Chinese economy and emerging markets of late, but for many years was seen as the best reflection of global growth, similar to copper in the commodities space. But in the last few days flows have been much constructive and we’ve seen multi-month downtrend breaks against the NZD and USD, while moves against the JPY and EUR have also been impressive. We would stay long AUD/USD for a move to 0.9233 (August 28 high), although given the extreme levels of short positioning, a break of 0.9233 could see 0.9344 in play. What is interesting is that the swaps market is now pricing in six basis points of rate hikes over the next twelve months, the first time the market has priced in tightening since 2011.
This seems very in tune with the market’s pricing of other central bank action, with the market expecting rate hikes in the UK despite the BoE maintaining it won’t raise rates until it sees 7% unemployment in 2016. In the US the market expects three hikes by June 2015 – the time when the Fed had previous stipulated it would raise. We feel a lot of good news is being priced in the longer-end of the curve at present, and a number of bond funds will be looking at entering long positions on any further sell-offs, although traders will be nervous holding treasuries in case of a strong non-farm payrolls report on Friday.
USD/JPY also looks primed for a move into the 100 to 105 range and would probably be there if it wasn’t for tensions around Syria. It seems the market is nervous about pushing back above 100.00 and on some metrics looks overbought. Along with the AUD (mainly against the crosses) USD/JPY has been a macro favourite and traders are keen to add to core longs on a break of 100.00 and by all accounts they have been closing AUD shorts to drum up the funds ready to add to USD/JPY longs.
Today’s BoJ meeting provided no new information at all and as we thoroughly expected the bank to revise its economic forecasts higher. Moves in the Nikkei as well have been relatively contained and we will be watching for a daily close above 14,070 (the 50% retracement of the July to August sell-off).The market will be paying closer inspection to the upcoming press conference with traders keen to listen out further rhetoric around the sales tax and any clues as to what could be the subsequent trigger for further easing to counteract any negative side-effects from the tax.
The ASX 200 seems lifeless, down 0.4%, although this is more a function of traders booking some short-term profits in materials names, than concerns around the election. China is also down 0.1%, although the Shanghai Composite still looks like it wants to break the July high.
The directionless trade in Asia hasn’t really inspired too much in the way of out-of-hours index business, although traders are starting to warm to these markets and their bias is to buy. There is plenty of event risk for traders to manoeuvre around in the next twelve hours, with three central banks (Riksbank, BoE and the ECB) due out, the US ADP private payrolls (expected to fall modestly to 180,000 jobs), US weekly jobless claims and the start of the G20 meeting.
The G20 meetings have generally been non-events since the European debt crisis become less of a concern, but this meeting promises something for everyone, given the tensions in Syria and the potential rhetoric around tapering and the fall out in emerging markets. The ADP jobs report will also be closely watched ahead of Friday’s non-farm payrolls. As you can see the ADP report is a good guide for direction, but has tended to outperform in the last few years. Of the central bank meetings, the ECB meeting interests us most given the elevated nature of the credit markets (EONIA) and what is being priced in given the better data of late. The risk is Mario Draghi acknowledges the data and becomes more hawkish,; in which case we should see a strong EUR rally, with the market positioned for a continuation of dovish rhetoric. ECB member Joerg Asmussen may have set a trend when he said that he ‘sees risks if interest rates are too low for too long’.