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If we want to see a circuit breaker for these markets, it has to come from a weaker USD and that seemingly means it must come from a move higher in oil. What has transpired is one of the most amazing one-day moves in oil we will ever see, with US and Brent oil rallying 9% and 8% from yesterday’s ASX 200 close. The USD has been taken to the cleaners and the falls took place well before we saw US services ISM data or ADP payrolls.
The selling in the USD has been ferocious. It’s been one way and whether it was driven by oil selling, liquidity, a full re-pricing of US rate hikes, or some more mysterious theme, the USD selling has resonated in markets. You just don’t see a move a 300 pip move lower in USD/JPY every day, with price trading ¥120.04 to ¥117.06, although some buying has come into the pair. Confusion around Bank of Japan policy is elevated and while central bank governor Haruhiko Kuroda suggested yesterday that the BoJ have ‘no limit’ on where negative rates can go, an article in today’s Nikkei publication is talking today (citing a ‘senior BoJ official’ ) about limiting the new reserves penalised under the negative rates system to ¥30 trillion. Confusion reigns, but either way the Nikkei will likely be sold today on JPY strength, while all other equity markets will perform nicely.
The commodity currencies (AUD, NZD and CAD) have taken off and the moves will resonate with the likes of the RBA and RBNZ. AUD/USD traded in a 25-pip range for most of yesterday’s session and put on a lazy 200 pips (high of $0.7189) as we pushed into European trade, printing a sizeable outside day reversal pattern that suggests scope for a further rally from here. It can be said, though, that the hourly chart is hugely overbought, so I wouldn’t be surprised to see some traders selling into the move in Asian trade.
The central focus, though, is oil and specifically whether we will or won’t get an emergency meeting between OPEC and non-OPEC members, driven from comments (reported in the Iranian oil ministry’s news service) from the Venezuelan oil minister. Naturally, any real backbone to a concerted cut in production would send oil prices higher from here, and it’s important to hear that Russia and Iran would potentially be in the party. This all seems quite bizarre to many given the comments the Iranians have been making of late, but this is a fast-moving ship and newsflow changes rapidly. Something is certainly brewing in the background, but such is the volatility in crude at present that we could easily see the price up or down 5-10% in today’s session!
Asian equities ex-Japan will likely be supported today and I suspect we should see follow-through buying after the open of the various markets. These are markets which require constant attention – they are for day traders, with price reversing aggressively with ease. With oil prices rallying so aggressively and the USD under such strong pressure, it could tell a lot about the psychology of this market if we do see money managers really coming back into stocks on volume. It could provide a real sense that people don’t want to get left behind. On the other side of the coin, a selloff from the open would show a strong mistrust of the move and many will feel that, regardless of a cut in production, there are still many macro concerns to address. If the USD does find further selling, then what will be the response from the ECB or BoJ? They can’t be happy with what they are seeing, while AUD/USD is more than 5% above the RBA’s fair value model on the pair.
We are calling the ASX 200 to open above 4900, which isn’t hugely impressive. But considering SPI futures have rallied 80 points from the overnight low, things could have looked rather different. Energy will obviously lead the best performers today, while BHP’s ADR is pointing to a 4% gain on open. The banks will naturally be the key to a bigger move in the overall index and I suspect we shall see fairly modest gains in this space on open.