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Japan is leading the way today with a 1.1% rise and trading firmly above 14,000 despite the pending sales tax hike issue. It’s all about industrials in Japan as investors pile into construction and materials names in anticipation of an infrastructure lift as Tokyo gets ready to host 2020 Olympics. The construction and materials sector has surged around 3% today, while industrial goods and services are also enjoying this prompted talk of more stimulus flowing into the Japanese economy, and in turn weakening the yen. Mr Abe is likely to make it his mandate to lift infrastructure in time for the Olympics.
Japan is Australia’s second biggest trading partner and we are in a good position to benefit from Japan’s spending as well. This is why many analysts are now looking at AUD/JPY to outperform the majors. AUD/JPY has just broken through 92 and it will be interesting to see if it can finally break resistance in the 92.50 region, highest level since July. The BoJ minutes released today were a non-event as expected. Focus in the short term is likely to remain on the proposed sales tax hike. USD/JPY is currently sidelined at around 99.60 and could push higher if tapering talk intensifies. Looking at the equities in the rest of the region, the ASX 200 has climbed 0.5%, while the Hang Seng and Shanghai Composite are around half a per cent stronger ahead of China data.
Staying on the AUD theme, the local currency has continued its near-term rally, with Chinese markets close to get back into bull market territory. We feel the AUD is possibly leveraged to two of the most desirable economies to be exposed to at the moment in China and Japan. These two economies are primed for a recovery at the moment. This might be enough to see the RBA on hold for a while.
As a result AUD/USD is holding its ground above 0.925 as it becomes clearer that the global economy is in a better place. There is another round of data due out of Asia today. Locally we had NAB business confidence, which showed the strongest reading since May 2011 and reinforced the idea that the local economy has turned a corner in the short term. This has also resulted in the AUD maintaining its bid tone as AUD/USD rises to 0.926. We continue to feel the pair has breached key resistance levels and the current momentum is likely to take it back above 0.93 and into the 0.9320 resistance zone. Any strong readings will be used as an excuse to bid the AUD higher in the near term.
There is more China data out today, with fixed asset investment, industrial production and retail sales (+13.2%) to look out for. A 9.9% rise in industrial production is expected for August and no doubt expectations will be high ahead of all this data. Jobs numbers on Thursday will be the key event for the AUD, with analysts expecting to see another poor reading with the unemployment rate ticking up to 5.8% - another four-year high. However, improving global macroeconomic dynamics should be enough to encourage investors in the near term.
After a mixed performance yesterday on some profit taking, European markets are facing a firmer open today. While there aren’t any major economic releases due out of Europe today, there are a few developing stories to keep an eye on. Italy’s senate is set to vote on expelling former PM Berlusconi from politics, which could renew some political concerns.
EUR/USD was one of the best performing FX pairs and continued its recovery after a sharp reversal from lows in the 1.31 region. It ran up to a high of 1.328 in the absence of any key data from the region. Later today we only have French industrial production due out, but we feel the overall risk tone will set the pace for the single currency. While risk look upbeat at the moment, there is a lingering Syria issue which threatens to derail the recovery should the current status change. Latest reports suggest US leaders are considering halting any air strikes should Syria comply with a Russian proposal to relinquish control of its chemical weapons. Although tapering talk has continued, the US dollar index is actually threatening to break an uptrend which has been in place since August. There is no major economic data out of the US today.
The local market is just holding its head above the 5200 level and we feel a close above here will be pivotal for an acceleration of gains in the near term. A close above 5200 will be positive and could lead to a move up to the year’s highs in the 5250 region in the near term.
It’s all about resource names at the moment, with China and Japan driving sentiment. Following recent gains, a number of resource stocks are knocking on key resistance levels, with BHP near $36, FMG at $4.50 and RIO pushing through $62.50. Should China data come impress again today we could see iron ore and in turn iron ore miners extend their gains in the near term.