Trader thoughts - the long and short of it

It’s clear the AUD is the king of the G10 currency block right now and the market has an insatiable love affair with the ‘Aussie’. As long as financial conditions stay as they are, then the AUD will really only go one way. Great for those thinking of holidaying in southern Europe in August. 

Source: Bloomberg

In the past month, the AUD has had its biggest move relative to the EUR (EUR/AUD has lost 3.1%), followed closely by moves in the SEK and USD. EUR/AUD has been my pick over the past two weeks and I am happy to stay short here, trailing the stop, but AUD/JPY has now broken out of the December highs and is at the highest levels since December 2015. If playing the AUD, the preference is still to be long relative to EUR and JPY, but we can add the USD, with AUD/USD breaking out of the consolidation pattern from early February. Next stop would seem to be $0.7780 (the November highs).

The event risk for AUD, fixed income and, to a far lesser extent, equity traders is the January employment data at 11.30am AEDT. The market is looking for 10,000 jobs to be created (the economist range is 28,000 to -11,000 jobs), with the unemployment and participation rate to stay at 5.8% and 64.7% respectively. Good numbers here could really make things interesting, as we have seen a nice pop in consumer confidence and business conditions are the highest since 2007. Mix in a central bank who is optimistic, low volatility (promoting the carry trade) and vulnerabilities in other currencies and you have the stars aligned for the AUD.

These are about as favourable conditions for AUD appreciation as you will see.

We can also add in the positive flow in developed market equities, which is also helping to keep positive sentiment going in the AUD. The S&P 500 is really unstoppable at present, but we have nice break-outs and in some case record highs in so many major markets. Data wise, we have seen good numbers overnight in the January inflation (ex-food and energy) read at 2.3%, while retail sales gained 0.4%, as did the retail control group, which feeds into the GDP calculation. This is another good indicator that the good-will towards equities has not just been driven by the feel good factor about the future with tax cuts and other fiscal measures providing stimulus, but we are actually seeing this reflected in economics right now. The US is seeing signs of ‘animal spirits’.

There has been quite a bit of Federal Reserve (Fed) chatter out last night with names like James Bullard and Eric Rosengren giving their opinion on potential Fed hikes this year. What’s most important here is that the market is just so comfortable with a somewhat hawkish Fed and we can even go as far as saying hawkish commentary is now seen as an equity positive.

Locally, the ASX 200 failed to breach the 9 January high yesterday of 5827, but a close above 5800 is still positive. SPI futures are fairly flat overnight, so let’s see how the bulls act after 10.15 to 10.30am, as this could be the time we see a renewed push into 5827. With sentiment globally upbeat, but not euphoric I still don’t see this as the time to be tactically short equities, although that time will come. Also keep an eye on SPI futures for a push into the January high of 5790, although that is still some way away.

Earnings play a big part today with a raft of companies reporting including TLS, SYD, S32 and ORG. Naturally, these don’t carry the same index weightings as CBA, and it will be interesting to see if the banks can push higher after the financial sector had its best percentage gain since 8 December yesterday. CBA’s ADR is up 0.2%.

On the commodity front, US crude is largely unchanged despite a large 9.527 million crude and 2.8 million gasoline inventory build. We also heard that US exports of crude hit an all-time record of 1.03 million barrels. Spot iron ore fell 0.7%, iron ore futures -1%, steel futures -1.3%, while coking coal gained +1.1%. BHP’s ADR is down a modest 0.2%.

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