The Shanghai Composite is 0.4% weaker and the losses come despite significantly calmer interbank rates. Manufacturing was the key theme yesterday and helped drive sentiment across the risk space with the yen losing ground. USD/JPY has been edging ever closer to ¥100 and printed a high of ¥99.87 in US trade. We might see some consolidation as the pair approaches this pivotal level. This move in USD/JPY has been supportive of a rally in Japanese equities as the Nikkei nudged through 14,000 earlier. Japanese equities remain well bid, with the Nikkei 1%. The key for the index in the near term would be a convincing break above 14,000, but this probably won’t happen until USD/JPY is back above ¥100.
Risk currencies bounced as investors reacted to a string of positive manufacturing readings across the globe. All these positive prints improved investors’ optimism/sentiment, and in turn commodities rallied. AUD/USD was perhaps one of the biggest beneficiaries of the recovery in commodities as it rallied to a high of $0.9254 heading into the RBA’s rate decision. Australia has been on rates watch today, and as expected the RBA kept rates on hold at 2.75%. It was another brief statement today and overall it seems the RBA is very comfortable with the current policy setting. It feels the AUD will depreciate further over time, which would help foster a rebalancing of growth in the economy. As usual, the RBA put in a disclaimer that it remains ready to pull the trigger should the need arise to support demand.
AUD/USD has dropped following the rate decision and statement. AUSD/USD is back below $0.92, but the volatility is likely to ramp up given how neutral the statement was. We don’t feel the statement is dovish enough to warrant selling the AUD at these levels. Selling into strength, particularly the $0.9320 region (which is the top-end of the range we saw in June) is likely to be a preferred strategy. This week’s lows at $0.9112 will be the level to watch to the downside.
Looking ahead to the European open, we are actually calling the major bourses weaker after having enjoyed solid gains yesterday. EUR/USD also drifted higher yesterday and moved away from key support at $1.30 as the single currency benefited from the risk play. The pair is now trading at around $1.307 with limited data on the eurozone calendar today. Spanish unemployment and PPI are the only noteworthy releases.
Goldman Sachs is quite bullish on the single currency and has initiated a long trade with a target at $1.35. The broker feels that further contraction in Euro-area risk premia and the large difference in the external balances will dominate and continue to support EUR/USD. We have William Dudley and Jerome Powell on the wires later today. This might cause some volatility for the greenback and in turn the risk space. Other releases to look out for will be factory orders and UK construction PMI.
The ASX 200 has jumped 2.2% and recouped all of yesterday’s losses, with the resource plays leading the charge. Gold has helped to light up the screens after a ferocious rally over the past couple of sessions. Newcrest (+5.5%), Perseus (+8.4%) and OceanaGold (+16%) are all enjoying stellar gains. Even the iron ore names are enjoying a solid session, with BHP rising over 2.5%. Mining Services company Boart Longyear has had another shocker, declining 12% after a string of broker downgrades. Most are calling for the ASX to return to between 5000 and 5200 points by year-end; for this to happen, the materials space will need to reverse FY 13, after having finished down 8.4%.