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Market Brief
The Australian GDP report released during the overnight session surprised to the upside beating market expectations of a 0.6% increase for the last quarter to come in at 0.8%. The year-on-year reading of 3.3% is relatively healthy and other G10 economies would certainly be happy with that rate of GDP.
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The AUDJPY long trade has continued to push higher towards the take profit level and as this currency pair is also my leading indicator for what other risk assets may do, I am expecting an up day for the equities on this first day of the new month.
The AUDJPY is also affected by the general moves of the yen and that plays into what the US benchmark yields are doing too.
The USDJPY yesterday was bid higher as the US 10-year yields also rose. The USDJPY is a great proxy for the divergence in monetary policy between the Bank of Japan and the US Federal Reserve. A rising US yield curve, the higher the USDJPY tends to go.
The forex heatmap at the London open today shows that being long the AUD versus short the JP is the way to go. However, there is dissonance within the forex market as the Kiwi is weaker while the Aussie strengthens, and the Swiss franc is relatively strong while the yen is weakest. This is not a great signal for those using the relative strength as a risk-on or risk-off trade bias. The Chinese Caixin Manufacturing PMI dropped below the forecast figure, so I would assume the Aussie would have dropped if had not have been for the good GDP data. European manufacturing PMIs have been mixed but the Final German Manufacturing PMI came in a touch better than expected. We wait to hear what ECB President Lagarde has to say when she gives as speech at the Green Swan Conference at midday today.
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The EURUSD is treading water but is showing more signs of weakness than strength. The larger time frame trend is to the downside and even though Deutsch Bank have predicted a 50bps rate hike this summer from the ECB this only sets the market for disappointment, when the ECB come out with a 25bps rate hike and a weaker euro.
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Clearly the European Union will have to do something about the rising inflation that yesterday printed a record 8.1%. The price of energy now that the EU have begun to really move away from the Russian oil and gas could go higher on decreased available supply. The US may be pressured into returning to a ban on exports to get the voters on side during the mid-term elections. We just need to see if the producers see this as a cap in the rise and start hedging more aggressively, or whether they believe they can pump more and still command higher prices.
During the US session we have some market moving Tier-1 data, starting with the Bank of Canada rate decision, and then the US ISM Manufacturing PMI and JOLTS Job Openings. There then follows some key Fed speakers so we may have to wait until after they have concluded to see the true direction the market goes with tonight’s close signalling the moves for Thursday.
The US Philly Fed Manufacturing data and the US ISM Manufacturing PMI tend to follow a very similar path, and todays US Man PMI is expected to come in 1 point below the previous reading. Personally, I am expecting a larger drop, and this could be a negative for the US dollar tonight.
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The US dollar index has not seen the RSI drop below the lower signal line for a very long time, and I just do not think that this correction is truly over until we get some capitulation selling into either the $100 zone or possibly down to the daily 200-period EMA.
