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IG Markets - Afternoon Thoughts

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Fuseworks Media
Fuseworks Media
IG Markets - Afternoon Thoughts

Across Asia, regional markets are ending the Easter-shortened week on a positive note, with all indices firmly in the black following the very strong corporate earnings and economic data out of the US overnight. The Kospi and Hang Seng are the best performers, up 1.1% and 0.9% respectively. Elsewhere, both the Nikkei 225 & Shanghai Composite are 0.6% firmer.

In Australia, the ASX 200 is currently 1% firmer at 4904, having traded to an earlier high of 4915. The strong appetite for risk which was evident in the overnight US session has spilled over into the local market with the bench mark index seeing broad based gains. With crude prices trading north of US$111 barrel it is of no surprise to see the energy sector leading the way with the materials sector not far behind on stronger base metals prices. Elsewhere, the financial, industrial and consumers sectors are also enjoying healthy gains.

It's all about risk at the moment. The pickup in corporate earnings and economic data over the last 48 hours has seen money flood back into 'risk assets'. The market seems to have largely forgotten about S&P putting the US credit outlook on negative watch, although the US dollar has been heading sharply south, underpinning strength in US dollar denominated commodities.

The US dollar index is very close to major support around the 74 region. It will be very interesting to see if we get some sort of a pause or consolidation in the downtrend as traders look to buy back short positions. At the end of the day, the fundamentals behind a weak US dollar are firmly entrenched and unlikely to change anytime soon. Whilst we may see a brief reaction around these levels, it's unlikely we'll see an end to the near twelve month long downtrend. Currency markets There's a 'fear of missing out' scenario playing out in the AUD at the moment. Many traders have been looking for the Aussie to pull back over the last few days; it hasn't and traders have started chasing it. At the same time, there are those who have aggressively sold the AUD expecting a sharply retracement; this recent rally has caused significant pain, with many throwing in the towel and covering back their shorts, which adds even more fuel to the rally. The move we have seen since Wednesday's low of 1.0443 has been nothing short of spectacular, with the AUD pushing up to a high of 1.0772 today.

The trend in the AUDUSD is clearly up and has been since May 2010; it's rallied 33%. Interestingly, the Aussie is only pricing in 20 basis points of tightening over the next 12 months. Today's producer prices (which grew 2.9% yoy) could be seen as a pre-cursor to next week's CPI print; the market will be watching closely to see if CPI confirms today's strength. Given a higher AUDUSD acts as a natural hedge against inflation, you can understand why credit markets are underestimating future tightening.

Whilst it's also fair to attribute a large percentage of the move to traders not wanting to hold US dollars, they have to hold something and that something seems to be Gold, AUD's, NZD's, euro's and even Yen, which in itself speaks volumes. On Tuesday S&P told everyone what they already knew; that the US fiscal position is precarious at best and that they need to get their house in order.

Obama and his team need to convince the market they have a credible plan to reduce their deficit over the longer term and this will involve stringent austerity measures that will weigh on future GDP growth. The fact China is looking to diversify out of US assets and PIMCO, the world's biggest bond fund have actually sold all of their US treasuries paints a pretty clear picture of the longer term sentiment towards the US fiscal position and the market is happy to go along with this sentiment, hence we are seeing a buyers strike on the USD.

We will have to wait until next week's FOMC decision which could spur some buying in the USD, however until then don't expect to hear Bernanke complaining about the weakness as every cent the USD weakens benefits trade balance numbers.

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