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Dovish Hilsenrath comments saw the USD hit against the G10 currencies. He suggested the Fed may lower its 6.5% threshold for unemployment and also possibly change its inflation target. With market expectations for tapering now pinned on September, any suggestions that tapering will occur after September will lead to USD weakness.
With the Fed and non-farm payrolls data out next week, positioning in the greenback is likely to ramp up. Meanwhile, unemployment claims were mildly higher than expected, and core durable goods orders also disappointed. This resulted in a disappointing session for the USD and in turn supported risk assets. The US dollar index is back below 82 and is looking vulnerable in the near term.
Japan has been a significant underperformer in Asia today, as USD weakness compared to the yen is generally negative for Japanese equities. USD/JPY has dropped below 99 to a low of 98.71 and this has forced the Nikkei to a 2.5% drop. With prospects of tapering post-September ramping up, it seems the Nikkei is starting to price in yen appreciation against the greenback in the short term.
Japan CPI showed a 0.4% year-on-year rise, which was better than a consensus of 0.2%. This is the highest level of inflation seen in the Japanese economy for a number of years and highlights that we are seeing a good recovery in the country. Investors generally struggle to interpret Japanese data as solid readings generally support the currency, but in this case a stronger yen is a negative. Overall this proves that Abenomics is working, but then implies the BoJ won’t need to increase the current rate of stimulus which is a bit of a dampener to a stimulus driven market.
The rest of Asia is quite mixed, with the Hang Seng flat, the Shanghai Composite 1% lower and the ASX 200 rising 0.5%. There has been plenty of talk around China’s credit recently as the rapid build-up in credit threatens to be a bubble following the changes in policies by the new government. Analysts feel the diminishing effect of credit growth on China’s growth is a reason for concern.
While Asia is mixed, European markets are pointing to a fairly strong start as they play catch-up to the gains seen on Wall Street. We expect to see gains in the range of 0.3% to 0.5% for the major European bourses. EUR/USD also popped higher, with a relatively in-line German Ifo business climate reading and better-than-expected Spanish unemployment rate. The pair came within striking distance of 1.33 and remains fairly elevated with some analysts feeling the eurozone is on the right path to recovery after its PMIs also showed some positive signs. There is nothing to look out for out of Europe today, and it should be a relatively quiet end of week for the single currency. In US trade we get the University of Michigan consumer sentiment and inflation expectations readings.
The ASX 200 is outperforming the region today with a 0.5% gain to 5059, with the banks driving the market higher. Commonwealth Bank has surged 0.7% to $74 and is around 18 cents from its all-time high. The other three big banks are also charging higher, while Macquarie Group has slumped 3.5%.The materials are weaker today, with BHP down 0.3% and RIO losing 0.6% as weakness in China weighs. PanAust is among the best performers today with a 7.5% rise on the back of its June quarter results. There has been a switch out of OZL and into PNA following the report.
Unlike OZL, which once again disappointed the market due to pit slippage, capital expenditure and low grades continue to dog the company. PNA has seen a 10% increase in gold output for full-year estimates at 110,000 ounces, while core business at Phu Kham has seen a 13% increase quarter-on-quarter to 15,500 tonnes versus 13,900 tonnes this time last year. Cash costs are also well ahead of OZL at US$1.45 a pound.