AUD – the hedge for emerging markets

Emerging markets continue to take a hammering as the fear around the moves in the Turkish lira prompted an emergency meeting of the Turkish central bank. 

The South Korean won is following suit on concerns around China (South Korea’s biggest market) flow into concerns around the peninsula state’s economy.

Similar inferences are being drawn for the South African rand, Brazilian real and Thai baht (this, coupled with the geopolitical issues in the country). All fell through support floors as the China story again hit the skids over the long weekend.

What is also apparent from a market perspective are the issues arising around emerging markets - they are leading money managers to hedge against emerging market risk, using the liquidity found in the most exposed emerging market G10 currency - the AUD.

The moves in the local currency over the past ten days suggest that AUD trading is not about inflation, nor employment data, CPI, rates or RBA monetary policy; money managers the world over are looking to the AUD and the liquidity it provides to play the developing emerging market story.

What is interesting is that over the past 48 hours, AUD/USD has moved from $0.866 to $0.875. The fear around another Fed taper and the effects on emerging markets seem to be based more on the effect it will have on profits made over the past year rather than a genuine fear of credit squeezes, as less USDs circulate the globe.

The moves in the AUD in the last two days suggest that the moves in January could have been overdone. This is the worst start to a year since 2009, which was the very tail end of the GFC. The trading in the AUD could suggest the markets are in for a bit of a pop this week, after contacting strongly over the past few weeks. Look for some green on screen come Wednesday and Thursday.

Ahead of the Australian open 

After last week’s higher-than-expected CPI data, the split between economists around RBA rates is making calls for next week’s RBA meeting a non-event. Rates will remain on hold; the easing bias will remain to compensate for the poor reading in employment space and softening confidence is moderating calls for a hike. However it is likely that the press conferences after the fact will highlight that inflation is now at the top-end of the comfort range, and will moderate any thoughts around a possible rate cut.

Today sees the release of NAB’s business confidence survey; further deterioration in business conditions are a concern. Business (particularly non-mining) has struggled to find traction, and with Australia’s earnings season fast approaching, any leading indicator of strength or weakness will have effects on stocks that have been under pressure over the past year.   

Currently we are calling the market down 62 points at the 10am bell (AEDT) to 5172 - that’s a 1.2% contraction. However, since the close of the ASX on Friday night, the futures are down 2.2%. This suggests the ASX should outperform. Yes the market will contract, however the pace and scale seen over the past two weeks is slowing and the likelihood of a bounce is increasing.

What will also drive trading in futures market today is Apple; although revenue and earnings in the first quarter beat estimates, Apple has given guidance for the second quarter well below expectations, which saw the stock off 6.2% in afterhours trading. Be prepared to see strong moves in US markets futures, which will push the local market around with it.

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