View: Still prefer Gold over balance of commodity complex, specifically Oil
Markets have been gearing up all summer for another dose of stimulus from the Federal Reserve and increasingly, the prospect of hard action from the ECB to prop up peripheral debtors, which although sterilised would still fit under the umbrella of looser monetary policy. Equities went early and have been range trading near the highs for the year as they await these decisions but other doors have opened with Gold breaking out of its long held trading range on August 21st to take run back towards the $1,700 level and commodities more generally have continued to edge higher, evident in the rise in the CRB and GSCI indices. Of course not all of this appreciation has been driven by expectations of more central bank printing; soft commodities have pushed up on US drought conditions specifically and oil prices continue to draw a bid from fears over Israel’s willingness to strike Iran’s nuclear programme not to mention the Syria situation which by itself is irrelevant for oil but nonetheless reminds on how divided the Middle East is (Syria in many ways now looks like a Saudi/Iran proxy war).
Full report below…
View: Sell AUD/USD, looking for pair to reconnect with bearish commodity prices
Sluggish growth is becoming an increasingly global phenomenon; contagion from the Eurozone crisis takes the largest chunk of the blame though efforts to cool Chinese overheating are also playing a part, particularly on the commodity side slowing demand growth across the complex. We identified both Copper and the AUD as potential ways to pay the Chinese slowdown risk specifically back at the end of March (http://bit.ly/LDya3l), both ideas have proved their worth although the recent bounce in AUD has erased a good chunk of gains that short positions recommended back then had enjoyed.
Full report below…
View: Copper, AUD offer opportunities to play Chinese market weakness
Risk appetite may have improved markedly this year but it looks as if investors will need to become a little more selective going forward if a reversal of early year gains is to be avoided. While charts continue to look very bullish in some markets (S&P500 for example) there are definitely problems elsewhere. The most prominent deterioration we’ve seen over the past couple of weeks has been in China with the Shanghai Composite losing around 9.0% since mid-March as China bears talk up hard landing risks again, a move that more than reverses gains made since Chinese New Year. In fact, the break of 2,264 means we should see a test of at least the 2,196/2,114 area in the coming days with the pattern of lower highs and lower lows in place since Aug’ 09 suggesting a break down through the Dec/Jan lows at 2,150 is probable.
European and US stresses starting to have a more notable impact on currency markets with the SNB on Wednesday surprising by cutting its target interest rate from 0.25% to ‘as close to 0.0% as possible’ in a move designed to soften the CHF and this has been followed up in Asia with new Japanese steps – the BoJ announcing a further expansion of its asset purchase plan and more forcefully intervening again in the forex market, forcing USD/JPY back towards 80.00.
Japanese authorities have been keen to weaken the JPY ever since March’s earthquake with a view to cushion the blow faced by exporters, which prompted the first coordinated G7 intervention since authorities moved to shore up the Euro back in 2000. But recent yen price action has not been a Japan specific affair but rather driven by others ills, specifically the European debt crisis and US debt/growth stresses. A successful turnaround of the longer-term JPY trend then requires not just steps from Japanese officials but a resolution of the fundamental risks emanating from Europe and the States. It can’t be solved by intervention.
The real issue for Japan is probably the on-going dominance of exchange rate pegs in Asia which places disproportionate stresses on the convertible currencies. The Chinese are clearly the prime offenders but the list is lengthy. One only has to look at JPY/KRW and the divergent fortunes of Sony and Samsung during the recovery to see our point. The JPY itself is not particularly overvalued as the chart below highlights, the Swiss have a far more compelling case and both look cheap compared to the mighty AUD. What really stands out is that before the financial crisis the JPY was cheap, a function of it’s then unique funding currency status.
Japan has never been renowned for its radical solutions – which would be needed to have a sustained impact on the JPY – and it’s doubtful we’ll see anything now given the dire state of the country’s politics. More intervention might be forthcoming but with risks in global markets on the up we don’t see this as a game changer currently. The liquidity provided by the BoJ then should be viewed opportunistically, with higher levels in USD/JPY offering attractive entry levels. We’d also note the EUR/JPY downtrend remains in place below the 113.90/114.50 resistance band. These trades should work on a number of levels, firstly risk aversion should encourage further repatriation from Japanese investors, both from the unwind of higher beta carry trade and stock bets but also from narrowing rate differentials, a consequence of falling UST yields. Secondly, slowing US growth could prompt the Fed into taking fresh action. Any further round of quantitative easing (the only tool as its disposal) would clearly be a dollar negative. Euro problems compound the pressures, the EUR’s previous safe haven status being vastly reduced by the peripheral debt crisis and growth data from the core looks to be softening up too.
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