Morgan Stanley have suggested to clients it’s tactically time to sell GBP/AUD at 1.81 (traders can sell now at 1.8136), with a stop at 1.83, for a potential move to 1.74. They are looking at the forward rate differentials in the bond market and feel AUD trades at a significant discount, while sterling on the other hand trades on a premium. Generally you will see currencies trade in-line with moves in the bond market, so in theory this trade makes sense. It must be said though that this trade is fighting a strong trend, but we have seen signs of exhaustion and divergence on both stochastic’s and MACD, so a reversal of this trend could be on the cards.
The ECB meet tonight, with the statement likely to be released at 23:45 AEDT, while Mario Draghi holds his press conference at 00:30 AEDT. We also get weekly US jobless claims, 3Q GDP revisions (expected to tick up to 3.1% from 2.8%) and factory orders. With EUR/USD at 1.36, the prospect of the ECB talking down the EUR is relatively high, although they will be fairly happy with the spike higher in excess liquidity in the eurozone. The ECB, like the RBA, can talk a good game, but at the end of the day we know the extra measures they have discussed (such as negative deposit rates) are a hard sell and won’t be implemented unless we see EUR/USD well above 1.40 and inflation drop below 0.5%.
The Japanese market closed down 2.1% amid comments from the Government Pension Fund (GPIF), detailing that their expected move away from domestic bonds (JGB’s) into more growth focused assets would not happen immediately, and they are in no hurry to undertake this shift. One of the main reasons why the market has been so well supported is on the back of traders trying to position themselves ahead of this move into stocks and other risk associated assets. At 10:50 AEDT today we get the weekly read on the Minister of Finance (MoF) fund flows and traders will be keen to see whether we see an eighth straight week of Japanese funds buying foreign bonds. A strong number here could see the JPY weaken, sending the Nikkei higher.
Iron ore continues to dumbfound the market; with the spot price moving to $139.7 per tonne (up 1% on the day), while consensus is maintained at $120 per tonne. This is also the highest level since August. If we look at iron ore in AUD terms, then things look even more compelling for the iron ore miners like FMG, RIO, GRR and AGO. With AUD/USD falling to test 90c, spot prices in AUD are testing the years highs of $156.27 we hit in August and this should support iron ore stocks. FMG saw good price action yesterday, on good volume and I’ll be looking for a break of the November high of $5.93 if iron ore prices can stay elevated at these levels.