Whiplash is the order of the day for risk bulls and bears as equity markets performed their fourth strong directional move in five days, increasing the uncertainty of the short-term picture here. The relative calm in Euro PIGS debt spreads today (tightening for Greece, relatively stable elsewhere), a super-strong ISM Manufacturing number, stellar sales results from US carmakers, and a strongly rebounding Goldman stock seem to have given bulls the green light for the day, as US equities posted their strongest single-day gain since February.
This is the second strong rebound in equities since the Goldman hearings early last week saw the risk bulls first meet serious resistance. Other risk indicators were improved as well, thought they have not rebounded as emphatically as, say, US tech stocks. In FX, carry trades are higher again, especially in the JPY crosses, with NZDJPY nudging to new highs again, though AUD remains a tad cautious ahead of the RBA.
Elsewhere in FX, EM remains a bit of a conundrum as EM debt spreads have not tightened appreciably since widening a bit during last week's risk hiccup and equity markets there are also less ebullient. EM markets peaked earlier in the month than the US markets - a very interesting divergence. Is this just nervousness over China and its suffering equity market and attempts to crack down on credit there or is it a leading indicator suggesting smart money is pulling out of emerging markets? The USD/EM currency trade has long ago stopped following the risk appetite picture that it followed so slavishly before and for a long time after the great meltdown of 08/09 - at least in places. A few currencies, and especially the Turkish Lira, have managed to keep up the pace with global risk willingness.
Looking ahead
The market is looking for a hike from the RBA, which is mostly priced in. The March 2011 Australian STIR had its lowest close since April 7, so the market is leaning on the hawkish side of things. Watch the guidance from Stevens and company. The risk for the Aussie bulls is that the RBA indicates that it is front-loading the policy trajectory ahead of a wait and see period to see how the Australian economy responds.
The market is looking for a hike from the RBA, which is mostly priced in. The March 2011 Australian STIR had its lowest close since April 7, so the market is leaning on the hawkish side of things. Watch the guidance from Stevens and company. The risk for the Aussie bulls is that the RBA indicates that it is front-loading the policy trajectory ahead of a wait and see period to see how the Australian economy responds.
The new heavy mining tax (good for tax revenues and the sovereign debt side of the equation, which looks impeccable at the moment, though an asset bubble pop could see a sudden changing of that perception if the massive private sector debt in Australia were to be transferred to the public balance sheet a la the USA and Europe....) is another reason for the RBA to perhaps hike to 5.00% and then pause a bit to see how the mining-driven sectors of the economy are faring. As well, most mortgages in Australia are done at floating rates and a rate of 5.00% would represent a 200 bp tightening from the lows last year. The RBA/Aussie government may want to find ways to cinch off the housing bubble outside of simple manipulation of the Cash Target rate, and any hints that the RBA/government is looking for a solution outside of raising the target rate is a potential Aussie negative. The shortest term will be hard to trade on here, but owning downside volatility in AUDUSD is worth a thought.
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