Global Markets Overview – 12/3/13

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By Evan Lucas, IG Markets Strategist | December 3, 2013 10:34 AM EST

RBA D-Day

As with everything in the currency world, there are two sides to every trade.

Right now the talk is about the yen. The normal comparison currency for the JPY is the USD, however this can be applied to the EUR/JPY as well, but the most dramatic talk is around USD/JPY.

Right now we have a central bank in the US gearing up for a change in its unconventional monetary policy. On the flip side the Bank of Japan has clearly stated that until inflation is 'stable at 2%', the current monetary stance will remain, which is USD positive and JPY negative.

The BoJ's statement saw USD/JPY back at May highs last night, and the fact that there is over 27 difference pieces of US data and economic releases due this week (reaching a pinnacle on Friday with the release of the employment data), USD/JPY has (on paper at least) every reason to continue its current momentum.

Last night the ISM manufacturing data hit a two-year high and was well above expectations. If the employment and inflation data also beat expectations, questions will getter louder about when the Fed will move, and this will see risk currencies in the firing line.  

And this brings me to the AUD. Currently the local currency is well above the historic average of 75 cents; it is well above the RBA's 'comfort' level and it is making Australian economy uncompetitive.

Since the last 25 basis-point cut in August, the RBA has been battling hype around a housing bubble and the fact that lending is now at its cheapest level in living memory. It is why today's decision is a forgone conclusion that rates will remain on hold.

What will be key is the statement; just like the BoJ, the RBA has every reason to help the AUD on its current trajectory - which is weakness. We continue to hear three key things are impacting the local economy: concerns around employment, non-mining is still lagging its expectations and the of course the AUD's inflated price.

I believe that the RBA will use today's statement to push the AUD lower by retaining the easing bias. I believe its current bluff with regards to exchange rate intervention will get louder and the reasoning behind this again comes back to concerns around Australian competitiveness.

The RBA has every opportunity today to really pull the rug out from the under the AUD. Considering retail sales are expected to remain sluggish (even though today's data is the October sales and may see an election bounce) and terms of trade are holding the line at best, it is unlikely to counter the RBA's efforts.

The RBA only has to hard talk the currency for a few more months before the Fed will do its bidding for them. The strength in the USD is only going to get stronger; this is perfectly illustrated in the gold price at the moment, as investors switch out of the inert metal and into real return instruments such as US treasuries.

The fall in gold is the clearest indication that the USD is returning to an investment currency, which will only increase the bear market in gold, meaning USD pairs such as the AUD are set to move lower still.

So come 2:30pm AEDT, I will be looking for a statement with not only a slight easing basis, but hard talk about the AUD. As they say 'talk is cheap', and a cheaper AUD will be a benefit for all.

Ahead of the Australian open 

Ahead of the open the ASX 200 looks like following the current global weakness. The market looks like opening up 23 points lower to 5256, which would mean it is now 200 points from the year-to-date high seen in October and would have to repeat July and October's burst to finish 2013 at year-to-date highs.

Trade today will be subdued as investors await the RBA statement, which is unlikely to affect the equity market immediately, however if it does help the currency move lower, cyclical stocks that are denoted in USDs should strengthen later in the day.

BHP's ADR is suggesting the weakness seen in the stock yesterday could continue once more despite the London listing popping up and the iron ore price remaining about well above US$135 a tonne.

The retail space is one area that may benefit from data drops with the retail sales figures; this will be a measure of the election as well as and on historical averages. Retail sales do tend to have a slight jump on the newly-found stability, so be aware the estimate may be beaten.

Market

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

AUD/USD

0.91

-0.0046

-0.51%

USD/JPY

102.95

0.5650

0.55%

ASX (cash)

5256.80

-22.70

-0.43%

US DOW (cash)

16005.00

-96.50

-0.60%

US S&P (cash)

1800.89

-5.23

-0.29%

UK FTSE (cash)

6581.10

-52.90

-0.80%

German DAX (cash)

9387.30

-13.30

-0.14%

Japan 225 (cash)

15745.00

144.62

0.93%

Rio Tinto Plc (London)

32.35

-0.27

-0.83%

BHP Billiton Plc (London)

18.63

0.04

0.19%

BHP Billiton Ltd. ADR (US) (AUD)

36.74

-0.16

-0.43%

US Light Crude Oil (December)

93.82

0.64

0.69%

Gold (spot)

1220.00

-26.26

-2.11%

Aluminium (London)

1745.00

-6.00

-0.34%

Copper (London)

7030.00

1.00

0.01%

Nickel (London)

13487.0

27.00

0.20%

Zinc (London)

1879.00

-6.25

-0.33%

Iron Ore

136.80

0.40

0.29%

Nine Entertainment Grey Mkt

2.30

0.06

2.91%

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