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There doesn’t really seem to be any significant concern from traders around the upcoming US payrolls report (090:30 AEDT), although clients have been net buyers of USD/JPY, which will be one of the cleaner ways of playing a strong payrolls report. The market actually feels quite sanguine considering the ramifications could be far reaching and will almost certainly set expectations for next week if there is a reasonable miss (either way).
Many of the G10 currency pairs are seeing low range moves of late, and implied options volatility has dropped right off. In fairness, unless we see something in today’s US jobs numbers that wildly alters the picture around Federal Reserve policy, then volatility should remain subdued. It’s when we get massive disagreement that we get volatility which is so desired by traders. So, for this to occur we would probably need to see a headline jobs print below 160,000 or above 300,000 for traders to get excited about change. Throw in an average earnings (yoy) above 2.5% and both the US two- and five-year treasury will be dumped by investors and traders alike and the USD should fly.
Interestingly the US dollar index has already rallied for eight months in a row, which is the best run it has ever had. The fundamentals still suggest the run has further to go despite the USD having rallied 32% since May 2011; bear in mind the average rally during cyclical bull rallies is 7 years. The US economy has been the bright spot and as a result if the market’s roadmap for 3.1% economic growth this year changes in the data flow, the perception of monetary policy could change rather quickly. That probability seems quite low right now and as the Fed says we should all be ‘reasonably confident’.
Locally, traders have been picking up their short exposure to stocks like FMG and AGO, although there has been no real follow-through selling in iron ore futures today. Comments from the Chinese finance minister that the fiscal deficit may actually be 2.7% of GDP and not 2.3% have not supported despite this leading to increased spending, presumably at a central government level.
ASX 200 ending its six-week unbeaten run
The ASX 200 looks set to end its six week unbeaten run, which started since 16 January. Interestingly, despite the market rallying 13% in that time, consensus earnings estimates have fallen 3.1% in the process. This shows just how much moves in global markets; RBA interest cut expectations and dividend growth has played into the markets investment case. Earnings don’t seem to matter too much at present, as long as you are getting paid to be in a position.
There has also been limited interest to push EUR/USD lower during Asia and the consensus trade is to sell rallies in the pair on any disappointment in today’s jobs report. EUR/USD is slightly oversold, but if we do get short-covering then $1.1075 looks like a good level to work shorts into. Stops could be placed above supply at $1.1250, for a potential move to $1.0800. The lack of conviction is similar in European equity markets and our opening calls reflect this, although looking at client positioning some 76% of all open positions (from our global client base) on the DAX are short. Although there has been a slight bias to cover today.
There continues to be a healthy scepticism from retail traders about current levels in markets at present and this is in-fitting with the fact that 66% of all open positions on the S&P 500 are short, while 84% are long gold. I think S&P futures are worth keeping an eye on as well, which around 2100 looks like it could be delicately poised either way.
All roads lead to a weaker EUR; for now
Talking of confidence and it seems Mario Draghi got out of the right side of the bed yesterday and was about as upbeat as traders have seen him in recent times. His views of achieving 1.5% inflation in 2016 and 1.8% in 2017 seem optimistic relative to the market and are premised on full implementing of the QE program. The fact the bank is prepared to buy bonds with yields as low as negative 20 basis points increases its scope (or the actual ability) to buy €60 billion a month in assets, especially as 32% of all outstanding bonds have a negative yield now.
From an FX perspective when you hear that many of the local funds are unlikely to sell their bonds to the ECB, it really plays into the idea of selling rallies in EUR as the bank (much like the Fed in QE1) will have to reach out to foreign banks. This will result in foreign capital flows, which is effectively the essence of FX markets.
With the ECB buying more bonds than are being issued, this is a huge EUR negative. All roads at present lead to a weaker EUR and an outperforming equity market.