Stocks, M&A Rumors Fuel Risk Trade

0

The Aussie dollar has been on the resurgence today as trading in Asia rounds out a solid session which also saw Chinese and Japanese shares spike to multiyear highs. Much of the strength in the antipodean currency can be attributed to a surprise move by the Reserve Bank of Australia not to cut the cash rate despite market expectations which anticipated a 25 basis point reduction.

With an economy afflicted by lower commodity prices and weakness in China the RBA signalled that rates would stay as they were for the time being but left the door open to further interest rate cuts should economic growth and inflation continue to stagnate. The move has the AUD on a strong footing versus the dollar with a 35 basis point spike in the last 24 hours as the aussie now buys the greenback at the low .77 level.

Outside of Australia, trading in Asian equities was brisk on the back of strong survey data out of Japan along with the Bank of Japan’s decision to hold fast to its asset purchase program in the wake of inflation figures which continue to miss the 2% target articulated by the BOJ at initiation of its ‘Abenomics’ strategy. While equity markets in China and Japan hit new highs, price action in the Yen was more subdued with the yen trading in the high 119 range versus the US Dollar.

Moving onto Europe, despite the re-emergence of a potential Greek exit from the European Union, data releases that suggest softness in retail sales and German manufacturing, trading in equities has been sublime. The FTSE Eurofirst 300 closed trading yesterday at 7 year highs while today the index is once again on the upwards march gaining another quarter percent.

Conversely, the euro has had more of a measured response up only slightly against the dollar to the mid 1.08 level and down versus its British counterpart as the sterling has been driven higher versus both the greenback and the euro on the back of yesterday’s better than expected services PMI and Shell’s announcement to purchase BG group for 47 billion pounds. Right now, the market has the pound trading nearly a cent higher versus the buck at the low 1.49 level and nearly half a cent higher versus the euro with the sterling coming in at the high 1.37 handle versus the common currency.

With markets yet to open in the Americas, the S&P 500 is set to open barely changed from yesterday’s close as overnight futures trading has been lacklustre. The restrained tone in North America is at least in part due to investor nervousness as Alcoa is set to kick off earnings season today, many investors are concerned that weaker global growth and the stronger USD will negatively impact corporate financial performance across the board. Legitimising these fears, the greenback has been back on the ascendance recouping much of its losses after Friday’s dismal employment report.

The third miss in a row in employment growth took the air out of the big dollar’s sails as traders evaluated the potential of slower than anticipated rate increases from the Fed. While trading in the buck over the last few sessions has taken a stronger tone, today is an exception to that trend with the dollar index facing pressure from strength in all of its major crosses in Asia, Europe and North America.

Of particular note, is strength in the loonie ,with the USD trading at the low 1.24 level versus the Canadian dollar prior to today’s release of the FOMC meeting minutes and crude oil inventory in the United States trading in the pair can be expected to be quite volatile today. With the new found strength in the Canadian dollar, today likely presents a favourable hedging opportunity for Canadian buyers of the USD ahead of a Canadian employment report due Friday, a report which faces a considerable risk of disappointment in light of the continued decline in the oil & gas sector and the knock on effect that has had for the broader Canadian economy.

In this week’s podcast, we feature an Interview with FXStreet President Francesc Riverola on the industry, volatility and more

Subscribe to Market Movers on iTunes

Get the 5 most predictable currency pairs

About Author

David Starkey is a currency options dealer and market analyst for Cambridge Mercantile Group. A fascination with the everyday impact of globalization on society led David to pursue a degree in International Business from the University of Victoria. From there Forex was a natural fit. He has worked as a currency trader, risk manager, and hedging expert in both Canada as well as the United States for several non-bank brokers. Cambridge Mercantile Group.

Comments are closed.