Firm greenback keeps risk currencies under pressure

It has been another mixed day for Asia, with China returning to trade on a downbeat note, while Japan and the ASX 200 have edged higher. 

Source: Bloomberg

The sharp drop in China’s imports yesterday has sparked fears that activity in the country will remain under pressure for a prolonged period. This has prompted a cautious tone among investors in China with some of the recently outperforming stocks experiencing some profit taking.

US dollar strength remains a standout in the global market space and this has been a key driver of price action for several asset classes. The US dollar index is approaching early 2013 highs, a break of which would see it trade at its highest since 2010. Japan has perhaps been the biggest beneficiary of this, as USD/JPY rallies to levels not seen since September 2008.

USD/JPY has now nudged through the ¥106 barrier and traded to a high of ¥106.17 in Asian trade. With USD/JPY at elevated levels, I feel the Nikkei could be paving its way back to the 16,000 level. The Nikkei is just testing last week’s highs and seems to be enjoying some buying off the dips. When the Nikkei traded through 16,000 back in January, USD/JPY was nowhere near current levels and as a result investors will be hoping to see buying interest in Japanese equities pick up.

Pound sold off on referendum fears

Risk currencies including the euro, pound and Aussie have already lost significant ground against the greenback this week and it seems this trend is set to continue in the near term. Cable has printed a fresh low in a move that was triggered by The Sunday Times YOUGOV poll which showed the ‘yes’ vote for Scotland’s independence from the UK ahead for the first time. The pair didn’t even attempt to close the gap created at yesterday’s open and it seems traders were just happy to ride the momentum lower.

Some leaders have started making promises to Scotland if they vote against independence which just shows the level of panic setting in. The question now is whether the Scottish population will be convinced that plans to give the nation more powers will come to fruition. There have been suggestions that this is a good opportunity for Scotland to gain power and autonomy and still avoid the risks of separation.

Regardless, until a concrete plan emerges and we get more clarity of a shift in momentum in the polls, cable is likely to remain under pressure. Until then, there is a good chance we’ll see cable extend its losses and could even test $1.6000 in the near term.

Local data disappoints

The ASX 200 has managed to gain some ground after having struggled in yesterday’s trade. There have been a couple of disappointing economic readings, including NAB business confidence and conditions along with home loans data. Optimism was fairly high given the RBA recently said it is starting to see some positive signs in in business conditions and household sentiment.

Today’s benign economic readings weighed on the AUD, while equities found it a positive. The banks have all performed well apart from NAB which is being weighed on by its exposure to UK assets with the referendum presenting some uncertainty. However, it’s quite encouraging to see some gains for the materials for a second day and this will go a long way towards restoring some stability.

Weaker open for Europe

Looking ahead to European trade, we are calling the major bourses mildly weaker. In coming weeks there will be a lot of pressure on the ECB to flesh out the measures it recently announced and work on the technicalities of implementing them. The weaker euro has already started benefiting Germany as reflected in a strong trade balance reading and the region really wouldn’t want to see a situation where German data accelerates at a time when stimulus is needed.

Having dropped below $1.2900, there isn’t much support for EUR/USD at the moment and we could see the pair trade down to July 2013 lows at $1.2755 in the near term. On the calendar today we have French trade and government budget balance data. In the UK we have manufacturing production, trade balance, industrial production and a speech by BoE Governor Mark Carney. This will keep the sterling in focus after recent sharp falls.

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