European equities fly as QE sentiment swings, US dollar full speed ahead, ASX futures 27 points higher

We predicted last Friday morning that central-bank sentiment in Europe would swing during the next session from disappointment to enthusiasm following Mario Draghi's earlier announcement on quantitative easing expectations, and it did. The EURO STOXX 50 index of European large caps rose 2.70%, encompassing some big gains in Germany (DAX +2.39%), Italy (MIB +3.41%) and France (CAC +2.21%). There was definitely a missed message from the European Central Bank's Thursday rate decision conference, and those behind the scenes were clearly determined to spread the message that a broad range of assets would be purchased next year to avoid falling inflation rates. Fuelled by this as well as higher-than-expected US jobs growth released Friday, there were some big moves in major currency markets on Friday night.

Today's first chart shows the continuation of yen weakness (black line, showing the % move of USDJPY; i.e., US dollar buying more yen), US dollar index strength (grey line), Euro weakness (orange line) and Australian dollar weakness (blue line). With particular regard to the latter three indicators, one might look at this chart and predict that the US dollar has resumed its strengthening theme, which was put on hold a little in November. This is not surprising given that the US is the pick of developed economies in terms of growth prospects, helped by falling commodity/manufacturing input prices, low interest rates and low unemployment. However, while there's no doubt that Friday's positive jobs report (non-farm payroll additions of 321,000 jobs versus 230,000 expected) heightened trader expectations of a 2015 US rate rise, we should remain patient and see whether these jobs can soak up the slack in the US economy that is required to see inflation stabilise or head higher in the face of falling energy prices. Advance retail sales in the US will be released in the US next Thursday, and after a weaker-than-expected 2014 'Black Friday' shopping result, this figure could temper the mood a little.

The weakening Japanese yen (rising USDJPY currency pair) is a trend that I have highlighted in today's second chart. I find this currency hard to read. While it's breaking new technical highs and appears to be trending higher, this will be a volatile trade as the December 14 election nears. Polling data suggest that Shinzo Abe will be able to retain a super majority, ensuring he can drive home legislation and override votes in Japan's upper house. How much of this result is priced into the USDJPY I don't know, but I would suspect that if any trade exists here at all, it'll be a 'buy on rumour, sell on fact' conservatively-sized long USDJPY position that could be taken off the table a day or two before the election to beat the herds.

Today's third chart shows the iShares Treasury 7-10 year Bond ETF (BTMA) in black, which illustrates the demand for US government bonds in recent months and is highly-correlated with US dollar strength. The orange line is Pimco's Broad US TIPS index fund. TIPS stands for Treasury Inflation Protected Securities, and these are bonds that are designed to compensate investors for the effects of inflation, meaning that the returns are 'real', or adjusted for the devaluing effects of inflation. Demand for these TIPS has been relatively poor, as is illustrated by the relative performance of these two bond markets. While currency markets are reflecting trader optimism about an imminent US rate rise, nobody is basing that bet on rising inflation - the market simply remains of the view that rising inflation will not be reason enough for the US Federal Reserve to raise rates. I believe that, for these reasons, the strength in the US dollar will not be exponential and that currencies like the AUDUSD, EURUSD and USDJPY will require motivation from their respective governments and central banks in order to continue driving these trends of weakness against the US dollar. So with that rationale, one must ask themselves whether all the bad economic news in Australia is priced into its currency (I certainly don't think so), whether the prospective quantitative easing to take place in Europe is already priced into its currency (not quite but not far off, in my opinion) and whether the Japanese QE experiment will take flight once again after the December elections (I think this is anyone's guess at this stage - I find this pair too risky to trade on the basis of continue QE after the election).

Today’s charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to get your free $100,000 demo account.

Upcoming economic announcements: Japanese GDP at 10:50am, Chinese trade balance at 10:50am, all Sydney time.

comments powered by Disqus

DISCLAIMER: Rivkin aims to provide clear and simple information to those visiting our website. If any part of this disclaimer does not make sense, please phone Rivkin and ask to speak with a member of our Dealing and Relationship Management Team. Rivkin provides general advice and dealing services on securities, derivatives and superannuation (SMSF). Rivkin also provide SMSF administration and accounting services. Rivkin does not provide advice that takes into account your, or anybody else's, investment objectives, financial situation or needs. We strongly suggest that you consult an independent, licenced financial advisor before acting upon any information contained on this website. Investing in and trading securities (such as shares listed on the ASX) and/or derivatives (such as Contracts for Difference or 'CFDs') carry financial risks. CFDs carry with them various additional risks that differ from more simple securities such as fully-paid company shares. Some of these risks include not owning the underlying instrument from which a price is being derived, settling trades 'over the counter' with a financial institution rather than on a stock exchange, and using leverage to gain access to trades that may have a higher face value than your initial deposit. This risk of leverage means that it is possible to lose more than your initial investment. Our aim is to create more life choices for our clients, which means improving the wealth of clients throughout many market cycles by nurturing a relationship spanning many years. If you are not comfortable with your understanding of the risks involved before using a Rivkin product and service, please contact our office to seek further information or a Product Disclosure Statement, or make an appointment to sit with one of our friendly financial experts. It is in our interest for your Rivkin experience to be a rewarding and comfortable one. Rivkin is a trading name of Rivkin Securities ABN 87123290602, which holds Australian Financial Services Licence No. 332 802.