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US dollar moves remain the dominant theme as traders try to gauge how the tapering situation will play out. Moves in the FX space have also been fairly muted, despite a couple of data releases from Australia and Japan today. The US dollar index (DXY) remains within striking distance of the 81 mark after printing a high of 80.91 the previous session. With the crucial non-farm payrolls reading due out later in the week, positioning on the USD is likely to ramp up. Analysts continue to feel there is significant downside risk to the data on Friday given the sample size the reading was taken from was right in the middle of the government shutdown. As a result, a merely in-line reading should be enough to see traders add to USD longs.
Japan outperforming Asia
Looking at the equities in the region, the Shanghai Composite is down 0.2%, the Hang Seng is flat and the ASX 200 is 0.3% lower. The Nikkei is oscillating around breakeven on the back of the BoJ monetary policy minutes. USD/JPY will be one of the key FX pairs to watch heading into the non-farm payrolls. Any further gains in the USD will certainly appease Japanese officials. The pair recovered from a dip to 98.17 and is back in the 98.75 region, with today’s monetary policy meeting minutes helping the pair head back towards this week’s highs.
The key takeaways from the minutes were that some members feel the CPI increase may pause and also believe the government fiscal reform stance may weaken. This was enough to underpin the pair and see it maintain its strength early in Asia. It’s a relatively quiet week on the Japanese economic front and I feel most of the volatility in the pair is likely to come from the USD side of the equation. Buying dips in USD/JPY, particularly back into 98, could be the best value play in the pair at the moment.
Mixed open for Europe
Looking ahead to European trade, the opening calls are looking quite mixed with moderate losses for the FTSE and IBEX, while the DAX and CAC are pointing mildly higher. Manufacturing (anticipated to be 1.1% year-on-year) and industrial (expected at 1.8% year-on-year) production are due out of the UK at 20.30 AEDT, with a strong pick up in both readings expected. As we edge closer to the much-anticipated ECB decision and press conference,
I feel the euro will finally start to move out of this tight range it’s been stuck in against the greenback. In fact there is an argument for a pick-up in euro buying on the premise that perhaps the calls for an ECB rate cut following last week’s CPI readings are a bit overdone. While most analysts are in the camp that the ECB will set up a cut for next month at this meeting, mixed economic readings also make a case for a wait-and-see approach. With so much confusion I feel reacting to the ECB is probably a better play than pre-empting a decision. Unless the single currency jumps heading into the ECB, I would not be looking to sell it at these levels.
On the economic data front, Europe’s focus will be on services PMIs from Spain, Italy and for the region. There is also European retail sales data and German factory orders to look out for. In US trade tonight we get September leading indicators (expected +0.6%), while Fed member Sandra Pianalto speaks on the economy.
Big dividends coming up for the ASX
It has been a subdued trading session for the ASX 200, with the majors disappointing ahead of some big days on the dividend front. Given nearly twenty points come out of the market tomorrow and over eleven points on Friday as heavyweights such as ANZ, NAB and WBC go ex-div, I would have expected to see some last minute buying in some of these names. CBA has been a standout among the banks yet again after delivering a stellar first-quarter update. The cash earnings of $2.1 billion were strong, and this feeds into the idea that its 1H14 earnings are around 4% up on the markets’ estimates. This was primarily driven by lower bad and doubtful debts, which are running significantly below expectations. The pre-provisioning operating profit was around 1% ahead of expectations, and many analysts will look at this to survey the underlying quality of the result.
Net interest margins are running “marginally lower” in the half, which fits with what we have seen from the other banks to report, and it’s worth highlighting that most analysts were expecting a slight fall in margins in 1H14 anyhow. CBA shares hit a new record high today and there is now plenty of talk around whether the stock is due for a reversal. Price action needs to be the guide and right now there aren’t any glaring signs of a reversal, although the new all-time high on the daily chart hasn’t been replicated by a higher high on the RSIs, and a subsequent fall in the share price would create divergence here – a classic sign that a reversal could be due.