RBNZ holds off raising rates

Five markets in focus today: AUD/NZD, NZD,JPY, Gold, Nikkei and FMG.


Central bank differentials remain a key driver of the pair medium term, and the RBNZ still hold a hawkish bias while the RBA remains on the dovish side. However, with the RBNZ leaving rates unchanged (although it remains committed to the rising rates) and the RBA meeting on Tuesday 4 February we believe there is a good long AUD/NZD trade considering the pair probably has a 40 basis point hike priced in. Any sign that the RBA is turning more neutral and away from the easing bias would leave the pair due for a pop and gives further reasoning to our short-term long call. 


Emerging market risk continues to be a concern globally; with Australia and New Zealand the most exposed to the China story in the G10; trades involving these pairs have seen downward pressure. The renewed pressure around China with the RBNZ holding the line on interest rises at its latest board meeting, the flight to safety looks even more advanced for NZD/JPY means the short is likely to accelerate from current levels as the BoJ looks to hold the line on its stimulus program.


Gold continues to move upwards due to the unease surrounding emerging markets. Risk markets continue to see support fading as paper traders repatriate funds out of emerging markets on risk fears. Gold is also finding support with the Chinese Luna New Year seeing demand for physical gold experience seasonal demand, as China overtakes India as the biggest consumer of gold. This short-term long call is expect to reverse over the medium term as inflation in the US remains well below estimates and trades in the USD and US bonds become a stronger investment cases.


With the flight to safety well underway, the inverse correlation between USD/JPY and the Nikkei remains in lock-step. The USD/JPY has slid over 0.67% as the unwinding of the biggest ever carry trade from the Bank of Japan hits full pace. The repurchasing of yen and its repatriation is going to see outflow from the Nikkei at a rapid rate. The futures market is expecting the Nikkei to fall by 2.5% and that will quicken with any acceleration in USD/JPY. The short in the Nikkei is likely to be an advantageous trade.    


Fortescue is due to release second quarter numbers, with expectation of total shipments to hit 127 to 132 mega tonnes, with production for CY13 at 155 mega tonnes. The chart on FMG has just started to revise a recent downtrend and thought today is likely to see red on screen across the material space. If FMG sees revenues and production numbers above estimates it should stem the tide and see the uptick heading into first-half numbers pointing north.

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