By Arnaud Masset, Market Analyst, at Swissquote
The US dollar erases previous losses against most G10 currencies while commodity currencies bounce back as investors seek riskier assets. The Japanese Nikkei is the biggest winner in Asia this morning as the index is up 7.71% in Tokyo while the broader Topix index gains 6.40%, erasing most of last week’s losses in just one trading session. In China, mainland shares are also buoyed with the Shanghai Composite gaining 1.32% and the Shenzhen Composite jumping 2.08% as investors bet on further policy stimulus from Asian central bankers. The Hang Seng index is not left out as Hong Kong shares rise 3.72% while in South Korea; the Kospi index reaches a 1-week peak, up 2.96% to 1,934.20 points as August unemployment rates printed well below expectations at 3.6% versus 3.8% median forecast.
***Yann Quelenn, Market Analyst, Swissquote: “At an event that was held yesterday in Tokyo, Japan’s Prime Minister Shinzo Abe declared that the effective corporate tax rate of about 35% will be cut by next year by at least 3.3%. Abe stated that he is willing “to go beyond that if possible”. Indeed, for the moment “Abenomics”is not living up to expectations. Consumer spending is very low and the country is struggling to exit a 20-year period of deflation. As we see it Abe is now grasping at other ways to stimulate the Japanese economy as “Abenomics” is clearly failing to provide the necessary results. On Tuesday, the final read of the second quarter GDP came in at -0.3% quarter-on-quarter, improving by 0.1% from the first print. Furthermore, the annualized GDP deflator diminished by 1.5% from the first read of 1.6%. Prices are still increasing but at a slower pace.
We believe that Japan’s economic strength is of serious concern. Despite all measures provided by “Abenomics” – in particular the money waterfall -, there is no current pickup in inflation. The Bank of Japan’s inflation target of 2% is still quite distant. However, Governor Kuroda remains confident and Central Bank officials maintained their view that the pace of asset purchases will not be increased. We remain bullish on the USDJPY. Over the past few weeks, the yen has strengthened on markets pricing in a later rate hike. Nonetheless, Shinzo Abe is running out of arrows and there is no clear path to recovery ahead. 122 seems a decent target.”***
Australian stocks are no exception. The S&P/ASX is up 2.07% in Sydney while the Aussie is back above 0.70 against the greenback, despite Westpack consumer confidence falling 5.6% in September after a July increase. AUD/USD is up for a third day straight, rising 2.20% to $0.7050, as iron ore futures (for January 2016) soared, gaining almost 6% over the same period. On the upside, the next key resistance stands at 0.7206 (high from August 28th), while on the downside, the September 4th low of 0.6908 will act as support.
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The Kiwi is the other big winner this morning with gains against all G10 currencies. The New Zealand dollar is up 1.11% against the JPY, 0.98% vs. the EUR, 0.97% vs. the DKK, 0.82% vs. the Swiss franc, 0.74% vs. the GBP and 0.60% against the greenback. In the equities market, New Zealand shares closed up 1.09% to 5,671.42. The RBNZ is expected to cut its official cash rate by 25bps to 2.75% at tonight’s meeting.
In Europe, equity futures follow the Asian lead and are up 2% on average. The Euro Stoxx 50 is up 2.22%, the DAX 2.03%, CAC 40 2.11% and the SMI 1.88%. EUR/USD has proven unable to consolidate previous gains and is back below the 1.12 threshold. On the downside, the September 3rd low of 1.1087 will act as a second-class support while a stronger one can be found at 1.0809 (low from July 20th). On the upside, the euro has some room to manoeuvre as the strongest resistance lies at 1.1514 (fib 50% from December 2014 – March 2015 debasement).
It will be a busy day for the cable as a fresh batch of economic data is due in the UK today. July’s industrial production is expected to rebound from a 0.4%m/m contraction in June to a 0.1%m/m expansion. Manufacturing production is expected to remain stable at 0.2%m/m. GBP/USD bounced back to 1.5379 from 1.5165 (last week low) and is now taking a breather, slightly below the resistance standing at 1.5415 (Fibo 38.2% on August September debasement). We remain bullish on the cable as we see an overcorrection of the GBP against the USD. We expect the cable to return to between 1.56 and 1.58 over the coming weeks.
Besides UK data, traders will be watching MBA mortgage application and JOLTS job opening from the US; housing stats and building permits from Canada; RBNZ interest rate decision in New Zealand.