by Stan Shamu, IG
While the rest of the world seems to be enduring an endless wall of worry, the US continues to power ahead with investors now pinned on this week’s non-farm payrolls reading.
Taking a step back though, it has been a slow start to the week for Asia, with mixed moves across the board. The headlines have not been pretty, with ugly protests in Hong Kong and another disappointing economic reading out of China showing declines in industrial profits. Protests in Hong Kong have seen the Hang Seng plunge while the Shanghai Composite is treading water.
Having said that, the real story in global markets is around the USD and the run it is currently experiencing. Friday’s GDP reading fuelled further gains for the greenback. The divergence between US economic data and the rest of its major peers continues to grow.
Dollar strength in focus
USD/JPY remains one of the key currency pairs to watch at the moment – particularly as Fed members emphasize the data dependency of a lift-off in rates and the BoJ remains quite dovish. Fed members were, on balance, more hawkish last week and it is clear a lift off in rates will be largely data-dependant.
As a result, this week’s non-farm payrolls data will carry significant weight and go a long way towards shaping rate hike expectations. After a slump the previous month (142,000), non-farm payrolls are expected to bounce back strongly with a reading north of 200,000. Analysts feel a strong reading on Friday could then see the Fed drop its ‘considerable time’ reference as far as rates lift-off is concerned.
On Wednesday we have the ADP non-farm payrolls reading and Thursday brings unemployment claims. There are also a few members speaking, including Lockhart, Bullard and Evans. However, they were quite vocal last week and, as a result, we’re unlikely to hear anything new.
There is potential for the greenback to extend its gains, particularly against the yen after printing a fresh six-year high on Friday. USD/JPY has been in a screaming uptrend since mid-August and remains within striking distance of Friday’s six-year high of ¥109.54. Once this is breached, I feel August 2008 highs at ¥110.67 will be the next key level to look out for. With USD/JPY in such a position, the Nikkei is one to watch and could be in for a stellar week. Already the Nikkei has been outperforming the region today and I feel dips could be used as an opportunity to buy.
Risk under pressure in Asia
The risk currencies have struggled against the greenback and AUD/USD just seems to be in freefall at the moment. Straight out of the gates we’ve seen AUD sold off and the pair even ventured below $0.8700 for the first time since January. In fact, AUD/USD traded as low as $0.8660 and I feel this could be tested in the near term.
While most of the activity is likely to be on the USD side this week, AUD moves will be pinned on commodities and China. China’s official PMI reading is due out on Wednesday and, after the HSBC reading showed some improvement, perhaps this will be a positive as well. However, there will be plenty of scepticism. With protests kicking off in Hong Kong, risk is likely to be on the back foot in Asia.
The ASX 200 also extended its losses today, trading to its lowest since February with the banks taking another leg lower. There is a clear lack of confidence in the banks and key materials plays as investors are largely spooked. The fact we are heading to the end of the quarter will also be at play, with some window dressing likely. Investors will have to exercise caution in this market as the right trade will eventually reveal itself once the dust settles. For now, though, US dollar plays are not a bad place to be.
ECB meeting in focus
Looking ahead to European trade, we are calling the major bourses mildly firmer with investors looking ahead to the ECB meeting. This, particularly the press conference, will be a major event for markets. Some are hoping Mario Draghi will signal or give details of more stimulus to come. However, given the first TLTRO allotment was only just deployed, it seems unlikely the ECB will be looking to be too aggressive for now.
Additionally, the recent TLTRO allotment uptake was fairly low and perhaps the idea is to see this pick up first at the end of the year. Regardless, the euro has continued to slide and this is partly to do with some soft releases over the past week. EUR/USD has breached July 2013 lows and is now testing November 2012 lows. On the calendar today we have German and Spanish CPI readings to look out for.