Japan leads the Asian region higher

Asian equities have come to life after a subdued start to the week. We’ve seen key reversals higher in the Nikkei (+2.2%) and the ASX 200 (+0.3%).

Meanwhile, the Hang Seng has surged 1.5%, but the Shanghai Composite is relatively flat. A relief rally in Japan - after the recent steep falls - helped the Asian region recover today. There has been a lot of talk about the Fed and QE expectations as we approach the pivotal FOMC meeting. Despite the big moves in equities, the FX space is surprisingly subdued. The USD will take over from the yen as the currency of focus, with plenty of positioning ahead of the FOMC and reaction post the FOMC meeting. The dollar index (DXY) is also approaching a key level in the 80 region, after having traded as high as 84.50 in May.

Currencies

[currencies: USDJPY|USD/JPY] has found some buying after having been on the verge of breaking Friday’s lows in the ¥94 region. The pair has printed a high of ¥94.8 in Asia, but still faces significant downside risk from a price-action perspective. Should the pair break support in the 94 region, it could be headed to ¥93 in the short term, where the 200-day moving average is positioned at the moment.

AUD/USD made an attempt to push higher, but its recovery stalled around $0.965 and dropped back into $0.957. We feel this strength might be a signal to sell yet again as the momentum from last week’s jobs numbers wanes. Tomorrow’s monetary policy meeting minutes could be a catalyst for a big move in the AUD this week.

Following last week’s impressive jobs numbers, the likelihood of a rate cut has dropped from 54% to around 40%, and these minutes might be a bit more dovish than what the market is priced for. The underlying fundamentals for the pair to remain weak include a potential winding back of QE weighing on the USD, China uncertainty, struggling commodity prices and RBA easing.

European markets

European markets are pointing to a relatively flat to mildly weaker open. However, there is potential for mild gains should the current strength in Asia continue. EUR/USD just continues to hold firm, while GBP/USD finally broke below the uptrend support line, which had held firm since the pair bottomed at $1.50. It dropped to lows in the $1.56 region, but has since managed to bounce back above $1.57. On the calendar later today we have European trade balance and the US Empire State manufacturing index to look out for. We also have the G8 meetings kicking off tomorrow.

With all the hype around the FOMC meeting - where the investment community will be looking for clues on QE - we wouldn’t be surprised if Fed Chief Ben Bernanke merely reiterates his comments regarding adjusting asset purchases according to economic data. Investors will also be watching growth and inflation forecasts very closely.

The local market got off to a poor start, but managed to rally off its lows, led by the banks. CBA and ANZ have jumped 1.5% each, while NAB has advanced 1.6%. After Friday’s rally, this is now clearly a case of fear of missing out on a potential recovery for the banks. Unfortunately the resource names haven’t been awarded the same interest, and they continue to languish in negative territory. Iron ore miners have not managed to take advantage of the 1.4% bounce in iron ore prices. BHP and Rio are both down just over 1%, while Fortescue Metals has declined 3%. In the healthcare space, Virtus has continued its run and climbed another 4% today.

Should the current recovery in the ASX 200 continue, we feel the 4900 level will pose near-term resistance.

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