China trade balance keeps risk rally alive

Risk assets charged higher overnight after China’s trade balance numbers set the scene for a recovery in sentiment.

The US dollar lost further ground overnight despite some better-than-expected unemployment claims data (333,000 versus 336,000 consensus), and this helped fuel the risk recovery further. AUD/USD was a star performer and the ‘squeeze higher’ that analysts have been talking about has finally come to fruition. The move back above 0.90 took out stops on the momentum plays and also spooked some of the AUD bears out there. The pair managed to print a high of 0.9135 and will be back in focus today, with the RBA’s monetary policy statement due out.

Tuesday’s statement was brief and the market is in desperate need of hints about further rate cuts. There is a strong possibility that growth will be downgraded for 2013 and 2014, and possibly a bit more upbeat about inflation following the recent rate cuts and a lower AUD. Should the statement not give away much, investors can look towards another wave of China data for some direction on the AUD.

From China today we have CPI (expected +2.8%), PPI, fixed asset investment, industrial production and retail sales all set to be released. Expectations will be riding high following yesterday’s solid trade balance reading and, should the data impress today, the AUD ‘squeeze higher’ might run a bit further. In fact, we feel even just consensus readings on China data will be enough to satisfy investors and promote the recovery. Sellers are likely to pile back in towards the 0.93 region, which has capped prices in the past.

Ahead of the open we are calling the ASX 200 up 0.1% at 5069. It already put in a strong performance yesterday so the gains from the US would have been largely priced in. While the market is still in negative territory for the week, investors will be encouraged by the strong recovery we’ve seen over the past couple of days.

Iron ore miners put in a strong performance in London, with gains for Rio Tinto and {shares:BLT-UK|BHP Billiton] in excess of 1.5%. BHP’s ADR is pointing to a 2.6% rise at 36.22 and the last time BHP traded above $36 was in March this year. Rio Tinto reported a solid first-half report, with earnings coming in ahead of consensus despite an 18% decline in earnings. Costs continue to decline but some analysts will be disappointed by the limited growth and expansion. The miner is currently focused on improving performance, strengthening the balance sheet and of course, delivering results. We expect gold miners to outperform today as the precious metal got a kick from the weaker USD. Copper and zinc also posted gains in excess of 2%. Tabcorp will also be in focus today on the back of its FY earnings. At first glance it seems net income of $126.6 million missed a Bloomberg consensus of $138.9 million, but a dividend of 8 cents might redeem it in this yield driven environment.

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