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The term ‘hedge because you can and not because you have to’ will ring true for more conservative investors, although we will need to see a rampant appreciation of the USD to really see strong risk aversion in markets. The fact that the VIX fell 7.5% on Friday hardly screams of panic.
There is plenty of news for market participants to digest. Asia-based traders will have their chance to react to the below par payrolls data, so one should watch the USD intently. The hawks will point to the 2.5% earnings growth and overall reduction of slack in the labour market, but it was comments from New York President Bill Dudley, continuing to call for two hikes this year, that were the key catalyst behind the positive reversal in the USD on Friday. Recall Bill Dudley, along with Janet Yellen, Stanley Fischer and Lael Brainard are still hugely influential, however the market is still highly sceptical around future hikes, with the next interest rate hike not fully priced until June 2017. Last week the USD rallied 1.5% despite the implied probability of a hike by the December meeting falling ten percentage points to 70%. This suggests the move higher was purely based on positioning and testament to a speculative community who, up until Tuesday, were running a net short position on the USD.
Traders also have been seen China report a 10.9% drop in imports in April (released on Sunday) this weekend and while we haven’t seen much of a move this morning in AUD, the falls in import volume should keep the downside momentum alive. The bears will take this as a sign that the improvement in domestic demand is wanning. A $6.4 billion rise in China’s FX reserves is positive, although it was purely down to changes in the valuation of its currency holdings and in actuality we saw a modest outflow, although not enough to trouble market sentiment.
We are calling for a modestly weaker open on the ASX 200 and see no reason for this to be hugely influenced by the weekend data given S&P futures have opened on a flat note. Good strength is likely in BHP (based on the American Depositary Receipt) and we may see a slight rotation out of banks. JBH and CAR are the stocks du jour and whether you are a trend, momentum or fundamental trader, the daily charts look very bullish – stay long until proven wrong. The change of the Saudi oil minister is also a key consideration, and we have seen a 2% jump in Brent futures, so watch for inflows into energy names on open.