Positive Friday in US & Europe, Aussie dollar blasts through six-month highs, ASX futures up 36 points

As discussed on Friday, the Aussie dollar needed the tailwind of a positive US non-farm payrolls report to extend its recent rally, and it got just that. The change in payrolls came in at +242,000 vs. expectations of +195,000 and a previous month of +172,000. The unemployment rate remained steady at 4.9% in the US and this meant that there was no holding back for those keen to add risk to the AUDUSD trade. I've carried the same two charts over from Friday, and you can see in the second one that the AUDUSD not only made new six-month highs, but it has also broken the August 2015 highs that preceded the Chinese yuan-related sell-off. Once again I'll reiterate that this may attract foreign buyers of unhedged Aussie assets and help lift equity markets here, as sentiment swings into 'risk-on' mode following the mid-February lows.

On the days that followed the screening of 60 Minutes' and the AFR's "Uncovering the big Aussie short" campaign based on the views of Sydney fund manager Bronte Capital, the ASX 200 hit a low of 4,838. The same market will open more than 300 points higher than that today, and the big four banks that were the targets of the anecdotal research are trading as much as 15% higher (ANZ) than the lows of that week, and they're all significantly higher than where they were before the article was first published. I think after such punishing falls on the ASX 200 last year, it is a high-risk time for short-sellers to be getting lippy with Australian investors. With regional (chiefly Chinese) economic growth being so heavily revised over the last few years and commodity prices having been sold so aggressively, it seems that aggressive moves higher in risk markets are ripe to take place. The sustained moves higher in the ASX 200 and AUDUSD are evidence of this.

The big caveat to all of this is that markets will do what they want, when they want; however, I don't think there is enough acknowledgement of the fact that markets have been behaving as though there is some global systemic GFC-like liquidity event when actually there is no firm evidence of one unfolding. Sure, we may see a hangover in certain areas like the overpriced residential developments being sold in Sydney, Melbourne and Brisbane, but that should only catch out the property developers who got in too late to the boom to tuck away enough profit already to ride it out.

The AFR writes about this today, and I'm inclined to think that this theme will emerge--selectively--in the small-to-medium developer space. There are 10s of thousands of apartments in these three cities due to complete over the next 12 months and if property prices decline over that period, you could see some pattern of rising defaults on the settlement of the 90% remaining purchase price. Unlike the "our banks are going to lose 80% of their share prices" sensationalist opinions thrown into the mix in late February, I think this story of residential property developer hardship is perfectly balanced and reasonable. If any of you are in funds or schemes that lend to developers in return for ~10% annual returns, my advice would be to start redeeming your money. I know too many people who completely misunderstood the risk in these structures and were burned following the GFC - now that the boom has plateaued, consider getting out. If you're in something that sounds remotely like this and you're not sure what it is, feel free to shoot details of it to customerservice@rivkin.com.au and we'll have a look at it.  

Keep watching for the red line (50-day moving average) in today's first chart to break higher and through the green (200 day) for more technical evidence that the bear market has been broken. For now, we're right at the top of the 2015 downward trend channel, and as this meets the 200-day moving average there will be an increasing likelihood of a pull-back from the latest rally.

My Danish economist buddy Steen Jakobsen from Saxo Bank is in Sydney at present and I took him for a swim at Bondi yesterday - after about 10 visits to Sydney, it was his first time to the beach! We spoke about the turning tide of emerging markets that he saw coming last year before the first US Fed rate hike. He also spoke of his positive outlook for the Aussie dollar, and for the same reasons that we discussed last year that trade is playing out. You can revisit the interview by clicking here.


Source: Rivkin, Saxo Bank

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This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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