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Equities have seen limited interest and although there are a couple of interesting corporate stories, moves at an index level have been limited.
The trade today has been long NZD, notably against the AUD; the pair has smashed through the former March downtrend at 1.1467, although has found buyers off the day’s low of 1.1383. The RBNZ spoke openly about putting up interest rates in 2014 and despite macro prudential initiatives of late, the bank seems to be on the same page as the market, with traders expecting the RBNZ to hike in early 2014.
The bank’s inflation and growth forecasts allows it to gently move its cash rate higher next year, although we remain sceptical that the 90 basis points of hikes that are priced in over the next twelve months will come to fruition. Still in the meantime there has been a change of mindset by currency traders, and if you want to express a bullish bias the NZD is the place to be, especially with the highest interest rates in the G10, but also easily the highest real bond rates (i.e. the ten-year bond subtracting inflation at 0.7%) at 4.06%. We feel this pair goes lower from here.
The AUD has been taken to the cleaners today, testament to it being thoroughly overbought in the short-term. The daily oscillators were at significantly elevated levels and clearly something had to give. The question we are asking now is whether traders buy the dips here or whether the AUD moves lower in the coming days given the poor jobs picture in Australia. The moves higher against its G10 partners have been thoroughly deserved of late given the improvement in global growth, and stabilisation in emerging markets that have allowed traders to pick up carry amid a backdrop of improving domestic indicators.
However, after today’s August employment report the RBA will be looking at the first back-to-back job losses in at least a couple of years and one of five occasions this has occurred in the last ten years. The Australian economy lost 2600 full-time jobs, so in 2013 the economy has created a mere 5600 full-time jobs, with full-time jobs lost in six of the last eight months. The participation rate fell to a five-year low at 65% and we question how much higher the unemployment rate would have been had if it not been for people leaving the work force (probably north of 6%). The chance of a November cut has increased, with the trend unemployment turning negative for the first time in ages and thus should take a bit of wind out of the AUD in the short term.
The Australian market has weighed up the prospect that jobs are being lost against a rate cut and pushed up to the highest level in five years (5252.0). The prospect of another rate cut has probably helped increase sentiment in the Australian market, with consumer staples, industrials and telcos the star performers, although it has to be said that when China rallied, so did the ASX 200 and we feel this was probably the bigger driver. The index is currently at 5248 and a close above the May 15 high at 5249.6 would be highly positive and clearly highlight market psychology. What’s also bullish is the sector rotation and perhaps this is function of valuation, given the market is trading on a consensus forward PE (price earnings ratio) of 15.3 times (some 14% above the long term average). Traders moving in and out of sectors is generally thematic of bull markets.
China has found buyers after hitting a low of 2226 (down 0.7%), although the market had rallied 21.2% from the June lows, so some consolidation is healthy. The index is still looking very positive indeed and we don’t expect a reversal anytime soon. The market is trading on a forward price earnings ratio of 9.8 times, which is the highest in a while and testament to the confidence Chinese mainland traders have found after seeing extremely low valuation in June, but not having the confidence to execute. Japan is modestly lower after the overnight pullback in USD/JPY. Price action in USD/JPY has been disappointing after the positive upside break of the consolidation triangle, although we would stay long for now targeting a break of 101.53.
The European session promises to be quite an interesting one, with traders focusing on the raft of BoE speakers due in UK morning trade. Due to speak we have Mark Carney, Paul Fisher, David Miles and Ian McCafferty, and with cable above 1.5800, the UK ten-year gilt above 3% and short sterling pricing in quite aggressive action, the prospect of dovish narrative is high. Still, cable looks strong right now having recouped around 70% from the year’s high to low. EUR/GBP could also bounce given the strong buying seen of late below 0.8400. Elsewhere we get industrial production for the eurozone and Italy and inflation reads in France, Spain, Italy and Sweden. US jobless claims will also be announced and are expected to increase modestly to 330,000.