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USD/JPY is the centre of the financial world right now and moves in this pair are not just correlated to the Nikkei, but also the S&P 500 as well. The key concern here is around the unwind of history’s most crowded carry trade (i.e short JPY positions) and thus when we see the JPY being sold, stocks struggle. As we saw overnight there was a slight uptick in the pair, however for USD/JPY to really regain the strong uptrend we need to see a close above 103.60. In today’s trade we get Japan’s December jobless rate and CPI at 10:30 AEDT, and given Japan are ultimately trying to engineer inflation this number is important. The market expects an unchanged read at 1.2%.
I suggested long trades yesterday and the pair is moving in the expected direction, with positive divergence clearly playing out. The fact the pair is now trading above the 21-day is interesting, as it has been below this short-term average for a record 62 consecutive sessions. At 11:30 AEDT we get the latest read on Australian private sector credit and the market expects a read of 3.7% annualised. I feel the pair has seen a major low and unless we see the Australian economy fall off a cliff we will not see the pair trade below 1.0500.
The index saw good buying activity overnight and a brighter day for the Australian equity market could be seen today. Good buying in Japan could help, however it’s the end of the month and we may see some position squaring. The index looks like it could squeeze higher over the next couple of days and we could see the 50-day moving average (at 5264) come into play. The index has been trading around one standard deviation from this average for a few days, but could revert back to the mean if offshore markets see better days. Get ready for reporting season which ramps up next week.
After yesterday’s 17% cut to guidance it looks as though every broker except Macquarie have taken the axe to either its rating or price target, or both. The 17% cut to 2014 guidance is never going to please investors and there are many who feel the A$190 million to A$210 million in full year EBIT is still far too optimistic. It’s also worthy of note that it was Australia, not China, that was the major source of the profit warning and I note that Morgan Stanley estimated that TWE’s Australian and New Zealand division accounted for 80% of the earnings downgrade. The consensus twelve month price targets now stands at $4.22, although Macquarie are bringing that average up as they have a target of A$5.75, which clearly needs to come down.