Pressure mounts on the AUD

We are finally seeing some positive signs in Asia with equities recovering from yesterday’s losses.

China is leading the recovery with equities bouncing off a two month low. While we are seeing a recovery in equities, there hasn’t been any real change in sentiment and this suggests there is some bargain hunting at play here. In fact, if we look at the risk currency price action today, most major risk currencies have been flat to lower.

AUD/USD has been closely watched this morning and finally looks like it is on the verge of giving up its grip on the 0.93 handle. At the start of Asian trade there were comments suggesting Australia was put on ratings watch by S&P doing the rounds. However this was clarified later on with S&P saying Australia’s AAA rating was safe although there are some external risks to the economy. The RBA’s monetary policy minutes didn’t bring anything new as expected, and in fact they are a little bit stale considering they are from the policy decision which took place before the budget announcement last week. Essentially, the fiscal tightening will only make the RBA’s job harder from a monetary policy perspective.

At the same time we have escalating China concerns which have resulted in a sharp commodities slump. RBA Assistant Governor Debelle was on the wires earlier saying lower capital inflows may result in a drop in the AUD. However, he balanced it out by saying there is still good demand for Australian debt. This has probably been the reason why the AUD had been holding up so well. From a trade perspective, AUD/USD is looking increasingly compelling for shorts and a potential close below the uptrend line which comes in at around 0.932 could signal further near term losses.


Europe in for a choppy open

Looking ahead to European trade, the opening calls are quite mixed with the periphery facing mild weakness. Yesterday’s session was dominated by some commentary from European officials regarding stimulus. ECB member Mersch was on the wires reinforcing the idea that June action is highly likely. Bundesbank chief Weidmann also noted that the ECB is keeping a close eye on the FX market as it assesses what policy action to take. He also urged not to be one dimensional when assessing the impact of a stronger euro from investors investing in euro bonds as this also has a stimulating effect to an extent.

ECB member Nowotny actually went as far as discussing the possibility of negative deposit rates. The overall impact on the single currency was relatively muted with EUR/USD remaining sidelined around 1.37. I continue to feel any strength in the euro could be used as an opportunity to sell the single currency.

Later today we only have German PPI to look out for which I doubt will have much of an impact on the euro. There will also be more commentary from ECB members which might deserve some attention. Over in the UK we have an April CPI report which is expected to show inflation picked up from the previous month at 1.7%.

ASX 200 holding on to gains

While the Australian market has managed to hold on to a modest gain today, it hardly feels like we’ve seen the end of the recent selloff. Pure iron ore plays FMG and AGO are enjoying some reprieve despite iron ore dropping below 100 for the first time since September 2012. In fact iron ore has remained weak in Asia with Dalian futures dropping below the 700 mark. This is likely to see iron ore prices drop and weigh on pure plays further. There seems to be a case of investors trying to pick a bottom in some of these miners and that’s always a risk strategy. It’s always better to wait for a confirmation of the trend reversal before making a move on these stocks.

Mining services stocks will also remain under pressure as long as commodity prices continue to slip. Investors have been quite happy to bid the more defensive yield plays such as the banks and Telstra higher today and that’s helping the market stay afloat.

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