AUD/USD Continues To Consolidate After Near 5% Decline In December

On the economic front, the overnight news suggests further improvement in the global economy, with US ISM manufacturing hitting two-year high (at 54.7) and German inflation rising a sizeable 90 basis points to 1.7%. Certainly both data points, when married with good manufacturing data from China, the UK and Australia will be taken well by those who feel we could see the global economy doing better in 2017.

Don’t read too much into the flat moves in US equity or US fixed income, as there have been some punchy moves in other asset classes and short-term opportunities are abundant. German bunds have been savaged, although EUR/USD has largely overlooked the German inflation numbers, with the pair trading to a new 14-year low of $1.0341 after the US manufacturing data, but has since succumbed to profit taking and showing once again there are sizeable buyers of EUR’s below $1.0400.

The cries of parity are getting louder and this will be compounded as we head to elections in Holland and France in the coming months. Certainly the US manufacturing data supports the view that US Q4 and Q1 17 growth will remain nicely above trend.

Staying in the FX space and AUD/USD continues to consolidate after the near 5% decline seen in December. The pair has traded in a range of $0.7183 to $0.7241 and resides closer to the top of this range as I type, where a break through $0.7250 should cause a re-test of the 21 November pivot low of $0.7310. It’s interesting that we have seen a reasonable strong sell-off in the key bulk commodities (iron ore is down 1.2%, iron ore and steel futures have fallen 2.5% and 1.6% respectively) and sentiment towards the AUD has not soured.

Put USD/MXN back on the radar as the pair is breaking higher and trading through a number of key technical levels at MXN21.0845. The fact Ford have announced it will cancel a new plant in Mexico and create 700 job opportunities in Michigan is interesting and while this is not going to dramatically revitalise the Michigan labour market it seems corporate America is moving in alignment of Trump’s plans.

USD/MXN Chart

In terms of volatility the commodities space has been interesting, and there seems to have been somewhat of a move from energy into precious metals. US crude basically collapsed close to 5% after hitting $55.00 in mid-US trade and technically looks to be putting in a double top. A move through $52 could be on the cards if we get a poor weekly inventory report (tonight 03:00 aest), with the market expecting a drawdown of 1.38 million barrels. Surprisingly the S&P 500 energy sector is still strong on the day and it will be interesting to see if Aussie energy plays can hold up this morning.

Precious metals have seen a good level of short covering, and my preference in this space has been to be long platinum and this trade has been working well, with price gaining over 4%. Technically we have seen price break out of multi-month wedge pattern and $1000 to $1020 would be my target here. We can also look at seasonality and see that that platinum has gained for 13 of the last 15 January’s, with views that traditionally car manufacturers tend to receive budgets in January and buy volumes of PGM in this window. There tends to be a fall in production as well during this period which supports price.

PL Chart

Gold seems to have putting in a bottom, but is finding supply into $1160. A break here and we could be facing a move back into $1200, and I can’t help but think the fact that US ‘real’ rates (i.e. inflation adjusted bond yields) have moved back into negative territory has helped sentiment towards gold, not to mention a market that is holds a fairly sizeable short position. Look for NCM to pull nicely away from $20 and despite the goldminer already having rallied 23% from mid-December I’d certainly rather own NCM (as a short-term trade) than be short.

The open of the Asian markets promises to be a fairly drab affair, with our call for the ASX 200 sitting up three points. Turnover through the Aussie market was predicably terrible yesterday at $3.74 billion (38% below the 30-day average) and that will likely be the case again today, although I’d expect turnover north of $4 billion. BHP’s ADR is largely unchanged, if we use the mining heavyweight as a proxy for the space, and I would expect banks to open ever so slightly stronger.

The trend in the ASX 200 is strong though and moves into 5700 should be supported and looking at the daily chart there are no red flags warranting more aggressive short positions just yet. Happy to stay long for now.

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