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Final day of jostling

With every single piece of commentary (including mine) focusing on the FOMC and all now expecting ‘patient’ to be removed, markets are just jostling for position as currencies do all the lifting.

Fed
Source: Bloomberg

Tomorrow’s meeting is heavily built into investor strategies – anything outside the norm will create an interesting event.

So until more clarity is provided by the Fed, I should highlight what is catching my attention.
 

The movers and shakers in the current environment:
 

EUR/USD

The pair saw some support yesterday. However, the investment house downgrades are coming thick and fast – consensus is for the pair to be at 96 cents by year end. This remains a source of strength for European equities and a key investment opportunity, in our opinion.
 

The Nikkei is rapidly approaching 20,000

It is a level that’s not out of the question. Although it has weakened recently, the inverse correlation with the JPY is still strong enough to predict daily moves. USD/JPY is chasing ¥122, which I think will propel the Nikkei to this level. The prospect of the USD punching higher in the next eight weeks is basically built into expectations. Couple this with the street talk that the BoJ may go back to the printing press and increase its QE program to ¥100 trillion from ¥80 trillion at present due to inflation forecasts of 0% over the next six months – all of this suggests the Nikkei could be the market to watch in Asia.
 

The Shanghai Composite versus WTI

There is a very strong inverse correlation between the Shanghai Composite and crude prices, which has been present for over three years. With current crude prices heading toward US$40, the current break out in Shanghai looks like it is ramping up. What also interesting is EPS growth on the composite is at its highest level in over half a decade. China is also a market to watch.
 

AUD/USD

The pair made a new six-and-a-half year closing low in US trade this morning and is structurally weak on central bank differentials. The RBA’s minutes yesterday had a bit for all on rate expectations. It was clear they are concerned about the heat in the property market, but not so concerned they won’t pull the trigger again. What was interesting was their discussions on 3 March was around rate effectiveness - something the interbank market took note of. The bank continues to suggest rate movements are not as effective as they once were and the interbank market took this as a reason to lower rate cut expectations to a 32% chance in April and 84% chance in May.

However, what is also clear is the major detrimental effect the iron ore price is having on the pair. Although the correlation between the two had broken down during the height of the US QE program, it is back in lock step and the declining iron ore price is seeing the pair follow suit. The impact on terms of trade is coming, so be ready for some poor reads in the next few years.
 

Ahead of the Australian open

We are currently calling the ASX down 6 points to 5836. However, the developing story in FMG is becoming a real concern. Having been unable to secure a bank loan facility, it offered up a secured bond issuance. This has now being pulled too as the yield required to get it away was estimated to be 7% to 9%. FMG has a 2.5 billion balance sheet hole to fill and it derives 96% of its earnings from selling iron ore to China – will it have to tap the equity market now? This would be tough to do as it is one of the most shorted stocks on the ASX.

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