Strengthening commodities bolster Aussie dollar, US & European equities rise, ASX futures up 76

Stronger oil, gold, silver & copper prices came as a relief to investors on Friday - global equities were higher and this helped buoy the Australian dollar, as it trades almost two cents off its 2015 lows, closing at US$0.8213 on Friday. Journalists are still picking through the wreckage from the Swiss National Bank (SNB) move last week, and I suspect that there will be a few more casualties than the handful of FX brokers and hedge funds who have revealed their losses so far. However, even though the Swiss franc punches above its weight in a similar way to the Australian dollar (today's first chart) in global FX volumes, this is--thankfully--a currency that doesn't interest Australian traders too much, and therefore the impact in Australia will be limited. It is a lesson that will be written into the history books for all central bankers of how not to communicate with their stakeholders; I know how dirty I was when the Reserve Bank of New Zealand accidentally published an old announcement caused a spike in that currency recently (to some of our clients' detriment), I cannot imagine how furious those affected by this Swiss franc trade are at the moment - it really was a shocker.

Take a look at the lower 'commodities' section of today's Global Markets matrix further down - note that all measures rose apart from iron ore.

In a similar way that US dollar borrowers took advantage of the low rates in the US throughout various rounds of quantitative easing in that country, euro borrowers may be in a position to take a similar view and suddenly the 'relatively' high yield of the Australian dollar and Australian government bonds will look attractive as an arbitrage. And if bonds get overbought in Australia, don't look past the possibility of foreign investors piling back into Australian dollars as a means to play that yield arbitrage - one thing is for sure, our central bank is probably about the best behaved globally. This just got even more important to those using currency crosses to invest away from where their local liabilities are.

There are a lot of stories about at present about US dollar strength, but don't be fooled - 'US dollar strength,' as measured by the US dollar index, will now embark on a euro-driven course as it is subjected to the relative value of the euro currency. If you'd like to take a bullish US dollar position, by all means short the EURUSD pair; however, know that the EUR is the driver in this pair. The US dollar, in isolation, essentially suffered another blow on Friday night as core inflation (that's consumer price inflation minus the effects of food and energy prices) fell to 1.6%, below the expected 1.7%. As I've repeatedly written about, consumer price inflation filters through from manufacturers to consumers slowly and over time, and consistency in the US$50 oil price will encourage manufacturers to pass on their savings due to competitive forces. I think the 'strength' of the US dollar is going to be fed by its relative value versus the next-largest currency in the world (the euro), and not its outright attractiveness as a currency that will be experiencing a regular rising interest rate cycle.

To illustrate this please refer to today's second chart and examine the swift sell-off in the EURUSD pair (orange), which is what is dragging the US dollar index (black) higher. If and when the ECB embarks on its stimulus program (the ECB policy decision will be announced this Thursday, Germany reportedly still very unhappy about lending to member countries with high default risk), the euro will be the global funding currency of choice and this might leave the Japanese yen and its quantitative easing program in the shadows.

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 CPI out 4pm today, Sydney time, with little else that will impact markets.

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