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Further pressure has been seen in AUD/USD, with it dropping back below the 90 cent handle. It is likely to come under further pressure today with the release of the HSBC flash manufacturing data. The release of the Fed minutes overnight reiterated that the unwinding of monetary stimulus should be the pre-set course and only a major degradation in conditions will lead to change in policy stance, which would lead to mild positive moves in the USD. The AUD looks to be under even more pressure, with expectations for HSBC flash manufacturing data to see further contraction to remain below 50 last month. What is also likely to affect the read is Chinese Luna New Year, which could see the read well below expectations. With the AUD the pseudo-China play, a poor read will see it lower.
The release of the Japanese trade balance data today is another insight into the state of the Abe government and BoJ’s stimulus programs. Both have been questioned as to their ability to further increase the inflation rate which remains below trend. If the trade balance shows a sign of weakness, particularly on the export line, USD/JPY is likely to come under pressure. Any sign that stimulus programs are becoming blunt places, will put further pressure on economic growth and raise questions whether the central bank has further option for stimulus.
The US markets are yet to register a read in the black year-to-date, as commentary around forward-valuations dominates risk calls and sees the index underperforming. At 14.3 times forward earnings, the suggestion of ‘overbought and expensive’ seems slightly overdone; with the US recovery holding its current course, even with the unwinding in monetary stimulus, the market is likely to catch up. The investment case for the S&P can still be made and the current underperformance is likely to correct over the coming weeks.
The ASX is now 1% off its October high as earning season produces mildly positive numbers which has seen cyclical stock moving to the top of their respective trading range. The technicals are suggesting the current rally is starting to exhort itself, and with ‘dividend month’ approaching a pullback looks increasing likely. Watch for a reversal as the index approaches 5450. We see a possible move back to 5300 over the near term.