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Japan the key focus today in Asia

Calm seems to have returned to equity markets and things are looking much more like 2013 again, with the S&P 500 eyeing a new all-time high after a 1.4% pullback.

We are also seeing European and Japan’s market firing again, while the ASX 200 has underperformed.

The big talking points that Asia-based macro traders have been talking about today have been the upside risk to US Q4 GDP after the larger-than-expected narrowing of the November trade figures. The trend break in EUR/CHF has also been noted, helped by an overvalued Swiss Franc and strong buying spree in the once troubled European debt markets. The upside break in USD/CAD has also been noted and trend followers have been all over this trade, especially when you are seeing the perfect storm of improving twin deficits in the US and poor trade and manufacturing figures in Canada. There is also the added kicker of having the head of the Canadian central bank welcome CAD weakness, which will always be well received by traders looking for a currency to short.  Whether the pair can close above 1.0804 (the 38.2% retracement of the 2009 to 2011 sell-off) and 1.0854 (the 2010 high) is key though for momentum to continue.

US Q4 GDP likely to be revised higher

Exploring the US trade data in more depth and we have to think that Q4 GDP should be revised above 3% now and shows that the US energy story is real and is a key catalyst for longer-term USD appreciation. However, growth is one thing and that feeds nicely into the story that the US is going to be the mecca for growth-focused traders of any asset class this year, but today the market switches focus somewhat and employment gets the limelight. The ADP payrolls report comes firmly into play, with 200,000 jobs expected to have been created and a good number here should mitigate a poor non-farm payrolls report on Friday, especially after the employment sub-components of the manufacturing and services ISM showed better expansion on the month.  We also get consumer credit and the FOMC minutes and there is plenty for the market to sink their teeth into here, with the Fed using the minutes as a key communication tool.

You know things are looking better in Asia when the Chinese market opens in positive territory, although we need to see the index hold the gains. The Rinminbi has held firm and that remains a key focus for macro traders and it’s clear the PBOC are using the currency as a tool to reduce imported capital, thus in turn trying to limit the activities of the shadow banking committee. This is not going away anytime soon, so expect USD/RMB to continue to grind lower through the year and I would not be surprised if we see 6.00 (it’s now just over 6.05) being hit at some stage.

Nikkei and JPY in focus today

The big mover in Asia has been the Nikkei, and subsequently the JPY. I don’t think the JPY is a screaming sell at these levels, especially given positioning in the market and the moves that will materialise on a poor non-farm payroll on Friday. However, the break above yesterday’s highs in EUR/JPY and USD/JPY has been noted. The ability for USD/JPY to hold 104.00 is key, but the divergence seen in the RSI’s and MACD keeps me quite cautious on taking out longs right now. The Nikkei naturally is in the same camp, with some focusing on an op-ed piece written by Shinzo Abe himself on the World Economic Forum website titled ‘Why wages in Japan are set to rise’, which is an interesting and must-read for anyone trading these related markets. Wage growth is now key to the ‘Third Arrow’ of Abenomics and thus the Japanese economy as a whole, and if inflation is going to move to 2%, then we need to see wages across the whole economy marrying up with higher prices.

As I mentioned, the ASX 200 is the underperformer; however there have been some interesting moves in some of the staple, healthcare and energy names. Certainly when the index was 0.7% higher in early trade it’s disappointing to see those gains evaporate fairly quickly. Materials are once again offered in a continuation of the last few days and 2013 as a whole. Iron ore stocks were slammed yesterday and while there have been some modest follow through, prices are stabilising. Iron ore itself is still at compelling levels, which are providing valuation support, while today’s Port Hedland iron ore export figures showed a 5% increase in December, while exports solely to China increased 8.5%.

On the FX side, keep an eye on AUD/NZD which is threating the 2013 low of 1.0734. With November retail sales in focus tomorrow, a number at +0.2% or lower could push the pair below this figure and there will be plenty of stops blow this level exasperating this move.

It promises to be a fairly lively 12 hours or so in Europe, with traders keen to see if US equity markets can join some of their European counterparts and turn positive for the year. This is especially true for the Spanish IBEX, which is taking inspiration from the fact that the Spanish 10-year bond is trading at the lowest levels since 2009. Greek and Portuguese bonds continue to take inspiration themselves from the fact that Ireland has regained full confidence from  bond market players. The fact that Greek bonds are trading at 7.89% (they were trading at 44% in 2012) shows some hedge funds have made some very tidy profits in recent times.

So apart from the US data and the $21 billion 10-year US treasury auction, the market is keen to watch out for German current account and factory orders, we also get Eurozone retail sales and unemployment, which is expected to remain above 12%.

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