A look at positions opened today from clients on the ASX 200 (using this as a proxy), shows an exact split of long and short contracts. Interestingly though, there has been a strong bias to take out long contracts on the S&P futures (66% of all new positions today have been long), although our overall book remains net short. Perhaps the positioning around the Australian market is a fair reflection of the fact that predicting price action in any asset class around tonight’s FOMC meeting is tough and thus we are seeing no clear directional bias. It also seems logical that if we do see the Fed leave its bond program unchanged, it will benefit the US market more directly.
Clear divergence seen between the ASX and Asia
I highlighted the divergence between the DAX and CAC yesterday, based predominantly on the economic outperformance Germany is enjoying at the expense of France. However it’s now become clear that a similar theme is playing out in Australia. Over the last month, the ASX 200 is down over 5%, while the Hang Seng and CSI 300, adjusted into AUD terms, are up 2.6%. The Nikkei has put on 4.3%, while the Kospi has gained 3.6%; thus there really is mounting evidence that global funds seem happy to buy Aussie bonds, but have limited interest in owning equity. Perhaps this is a reflection of valuations, the deterioration seen in the economy, falls in the AUD, or perhaps it’s simply down to better opportunity elsewhere. It seems global funds are underweight in Australian equities and it’s hard to see how this turns around anytime soon.
The focus in Australia today has largely centred on RBA governor Glenn Stevens, who spoke to the House Economics committee at midday. There wasn’t a huge amount of new information, although he did highlight that the RBA felt uncomfortable with AUD/USD above 90c. Forex traders will often look for psychological levels as a guide, and in the last five days we now know the RBA feel ‘uncomfortable’ with AUD/USD above 0.9000, but seem content with the pair at 0.8500. Given currency markets often overrun central banks soft guidance, we could see AUD/USD trade in a range of 0.8400 to 0.9200 in 2014.
We also heard Glenn Stevens highlighting again that the near-term function of the local unit will be more heavily dictated to by the Fed. This certainly seems logical, and even the most passionate of AUD supporters have struggled to put on more bullish positions of late, even against the NZD, which is now grossly oversold.
AUD/NZD pricing in much bad news
A number of traders have pointed to the fact that the RSI’s (relative strength index) on AUD/NZD are now at the lowest level (now at 24) in many years. Still, had you bought AUD/NZD on any move where the RSI falls below 25 since 2005, and simply closed the trade when the RSI moved to 50 (assuming you started with $100,000), you’d have placed six trades; 75% of them winning trades, and subsequently netting 6.75% in profit. Of course the fact that the trend is down is not helpful here.
Japan is moving higher, which is interesting because outside of emerging markets, the Japanese market would be the most heavily affected by actions or inactions of the Fed. The fact that the Nikkei is up 1% seems predominantly driven by the futures market, with big volumes going through today. It feels investment flow related, rather than any specific news driven event. There is talk we could hear Shinzo Abe detail new structural changes tomorrow, which of course feeds into the Third Arrow of Abenomics, while the BoJ is also looking to expand its loan facility by ¥1 trillion.
European markets look set to see modest gains on open; certainly helped by the fact US and FTSE futures have found buyers as the Nikkei moved higher. Traders will be focusing on the German IFO survey, while the Bank of Spain releases the latest figures around bad loans. EUR/USD continues to be bought on dips and the fact the ECB failed to sterilise its bond purchases for the second week in a row has the feel that the ECB are happy to keep a bit of liquidity in the system, which is a EUR negative. 1.3833 for EUR/USD remains the key level here and a daily close above here must mean 1.4000 is in sight.
It’s all about the Fed
Everything boils down to the FOMC meeting and Ben Bernanke’s press conference 30 minutes later. In a previous article I covered the different playbooks, but it’s worth highlighting that I feel the risks are we get a slightly weaker USD, while gold could pop modestly and we could see a bid in fixed income. This would be premised on the Fed holding off from tapering and thus keeping its forward guidance with regards to moving the Fed funds rate unchanged and modestly tweaking its economic projections, and leaving the rate banks on earn excess interest at 25 basis points. Of course this could be completely wrong and they may cut now, whilst also altering guidance, which again will provoke differing degrees of volatility depending on the size of the cut to its unemployment threshold. For me, given there is simply so many different outcomes, it can really pay to stand aside and wait until the market has really got a firm chance to assess the information. With event risk of this magnitude, the first move seen in markets is not always the right move and in cases like this it can really pay to be reactionary rather than try to prophesise.