IG Markets - Trading Wrap

IG Markets - Trading Wrap

It’s been a week to remember, especially for those who have AUD exposure. The kitchen sink has been thrown at the AUD this week and finally the bond market has not been able to save the currency as it closes in on a commodity price-based fair value model of around 0.9400. The AUD has lost 1.4% on a trade-weighted basis this week and 2.6% against the greenback, with AUD/USD also making six consecutive daily lower lows.

This week we have had BHP and Rio lowering capital expenditure by 18%; a number of well-known hedge funds shorting the AUD; talk of Japanese funds preferring Mexican bonds to Aussie bonds; further falls in commodities; momentum traders putting on more shorts and stops going off though key levels. And of course, strong flows into the USD.

Is the pair oversold, for sure? The 14-day RSIs are now at 20, which is the lowest since October 2008 (the RSI got down to 16), before we saw the 84% rally through to August 2011. The market is short and this weekend’s commitment of traders report (COT) should show the first net short position since June 2012, and that snapshot on positioning is only from Tuesday. We will have to see how the market trades into Wednesday’s testimony on the economy by Ben Bernanke, but any rallies will be sold.

NZD/USD has also added to the AUD pain, with the pair breaking a number of trend lines (including one drawn from the 2009 lows), while the break through the lower-end of the year’s trading range at 0.8155 has put the pair on track to target the November low of 0.8052.

(Daily chat of NZD/USD)

We wouldn’t give a huge amount of credence to John Williams’s comments in US trade, given his status as a non-voter. To be fair, his comments seem to be taken incorrectly, and for us he sees merit in curbing the QE programme if his economic targets are met, however, as things stand they aren’t. Ben Bernanke will not want to be remembered as the man who pulled the pin too early, thus handing Janet Yellen (provided she gets the gig) a big hole to get out of. Given the softness in yesterday’s data, especially the core CPI print, you have to think there are downside risks to the Fed’s preferred inflation measure - core PCE. We were premature in our belief that the USD was oversold and due a pullback, but the failure of the dollar index (DXY) to break the 2012 high of 84.00 could be telling. Perhaps that could materialise today.

As said earlier in the week, a pullback in the S&P 500 would be positive, especially after a 23% rally since the November low (57% in JPY terms and 30% in AUD terms). Nearly 90% of companies are over their 50-day moving average, while the index itself is 12% away from its 200-day moving average. Whether this pullback eventuates, it’s worth highlighting that the index has printed its first intraday lower low after eleven days of consecutive lower highs. The bears will certainly have taken note of this. Perhaps weak numbers in the upcoming university of Michigan report (expected to improve to 77.9) and leading indicators (anticipated to increase 0.2%) could help their cause. Minneapolis president Narayana Kocherlakota speaks towards the latter stage of US trade. He is a known dove and a voting member next year; recall he recently highlighted the risks around keeping policy ultra-easy, but suggested the risks were necessary.

The lead in for Europe is mixed, with Japan slightly lower, China up 0.3% and Australia gaining 0.4%. The strength in the ASX is largely driven by some covering in materials and energy names. Retailors have been smashed, courtesy of a profit warning from Target, while WorleyParsons has cut guidance t0 $320 to $340 million, some 10% below consensus forecasts. The defensive names have found sellers with staples, A-REITS and telcos under pressure.

Data in Europe is limited, with construction output and new car registration the highlights. Forex traders will also be keen to see Canadian CPI and Mexican GDP. US futures are down 0.4%, but could easily rebound from here. Company earnings are thin on the ground.

Ahead of the European open we are calling the FTSE at 6685 -2, DAX 8360 -9, CAC 3967 -12, IBEX 8521 -21 and MIB 17550 +6

www.igmarkets.com

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