FYI | Jun 12 2012
By Chris Tedder, Research Analyst FOREX.com
The ASX 200 is one of only two equity markets in Asia to be trading higher at the time of writing (currently around 0.20% higher), the other being the Philippine Stock Exchange. Most equity markets reacted fairly poorly to the turn in risk sentiment overnight, with the Nikkei 225 and Hang Seng both in the red by around 0.91% and 0.66% respectively. So, why is the Australian Stock Exchange performing noticeably better than its counterparts throughout Asia?
In China, mildly strong trade balance and lending figures over the weekend reinforce our belief that the domestic economy will be able to avoid a hard landing. This view is further supported by the willingness Beijing has shown to ease policy – especially the interest rate cut last week – and, in turn, stimulate growth. Hence, although we think the Chinese government needs to become more policy-aggressive to combat slowing growth, it is doing enough in our opinion to provide the market with hope that policy makers have both the will and ability to control China’s growth descent.
Usually traders would associate this sort of positive news flow out of Beijing as a reason to push Australian stocks higher, at least on the basis of overall risk sentiment. But the current small rally is not being led by the mining sector – the basic materials/mining sector is down by around 0.42% at the time of writing – which suggests the basis for the rally is not a result of the Chinese data. Also, with investors completely engrossed in sentiment regarding Europe more significant data out of China would likely be needed to significantly draw their attention away from the debt crisis.
Overall, the Aussie stock market has been less volatile than other markets in Asia. Whilst it didn’t open in the red like other markets in the region, it also didn’t push significantly higher throughout the session, unlike the Nikkei and Hang Seng which both retraced some of their opening losses. Thus, it looks like markets in Asia, excluding Australia, may have overacted to the negative sentiment stemming from Europe.
Early in the session, data out of NZ showed that credit card spending increased 1.2% m/m, modestly higher than the prior +0.6%. Also, Japan’s Tertiary Industry Index decreased for the second month in a row, printing at -0.6% m/m. The yen pushed a little higher on the back of the announcement, but it weakened significantly following a statement by the IMF saying JPY is overvalued. The fund went on to add that the BOJ should consider more monetary stimulus, and that an increase in the bank’s asset purchase program could result in the BOJ achieving its 1% inflation goal by late 2014, otherwise it is more likely to be sometime in 2015 the IMF stated said.
USDJPY smashed through around 79.35 on the back of the statement, before running into some resistance around 79.60. Nonetheless, even if the pair does manage to break through this level it is unlikely it could push through 80.00 with so much ridding on the Greek election this weekend. Hence, in the lead up to the election we favour JPY over commodity currencies.
Overall, USD should be well supported this week by positioning ahead of the election. Thus, we retain our cautious USD short view.
The views expressed are the author's and not by association FNArena's (see our disclaimer).
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