6 things Australian traders will be talking about this morning

Conspiracy anyone? (Photo by Rolex dela Pena-Pool/Getty Images)

US stocks rallied again on Friday taking the Dow back into the black for the year and leaving the bellwether S&P 500 less than half a percent below its 2016 start.

The rally in the US, and European bourses helped the ASX200 futures rally again with the June SPI200 contract up 29 points, 0.9% to 5193. That suggests another good day for local traders but can we break sustainably higher?

On the currency and commodity front, both the Australian dollar and crude oil reversed as the US dollar found a little bit of its old mojo. The Aussie closed at 0.7599 and is back at 0.7609. Nymex crude rallied initially but ended up down mmore than 1% and back below $40 a barrel. Gold is sitting at $1254, the USDJPY is back in the mid 11.50 region, Euro is at 1.1250 and copper is at $2.28.

Here’s the scoreboard (7.13am):

  • Dow: 17,602, +120 (+0.7%)
  • S&P 500: 2,049, +9 (+0.44%)
  • SPI200 Futures (June): 5,193, +29 (+0.6%)
  • AUDUSD: 0.7609, -0.0032 (-0.42%)

The top stories:

1. Some traders think there is a grand central bank conspiracy underway – here’s the best explanation why it’s a “grassy knoll” theory. Humans have told stories for thousands of years. Behavioural psychologists will tell you it’s also one of the most potent ways we have of rationalising the world around us.

Traders are no different. Faced with a recent set of central bank events (ECB, PBOC, Fed, RBNZ, Norges) they either didn’t expect or don’t understand they have cooked up a theory that at the recent G20 meeting in Shanghai a grand bargain in the vein of a Plaza or Louvre accords to manipulate forex markets and the US dollar. In weakening the US dollar the weight is then lifted off commodities and in turn that helps lift markets overall as the risk rally continues.

It’s a ridiculous theory and misses a few realities of modern central banking, markets, and divergent economic outlooks. But the best rebuttal comes from my favourite global strategist Marc Chandler chief currency strategist at Brown Brothers Harriman, who wrote:

The US and Europe could not press China (and others) to allow market mechanisms to drive foreign exchange prices, and then intervene when they did like what the markets had done. With the notable exception of the intervention after the Japan’s tsunami and nuclear accident, there was not G7 intervention in the foreign exchange market in recent years. Even during the 2008-2009 Global Financial Crisis (GFC), the G7 did not intervene. Swap lines between central banks provided access to the needed dollar funding.

That’s just one of the many cogent rebuttals Chandler makes. For another just look at the body language in the picture above from the recent Shanghai G20. Does that look like a conspiracy Janet Yellen is part of.

2. The ASX’s reluctant rally continues as it lags the US recovery. The ASX struggled to get back through Monday’s high at 5214 with the rally capped for the rest of the week and the 200 index closing at 5183 on Friday. That gain of just 14 points, 0.27%, under performed the 27 point, 1.34% gain on the S&P 500.

June SPI futures were up 29 points, which suggests another 0.56% gain in trade today. But add those points to the physical close and the ASX200 still pulls up just under 5214 – the level that seems to be holding the market back. Will traders have the gumption to drive prices through this week?

ASX200 Daily (Reuters Eikon)

3. Is the Australian dollar’s rally already over? Like the ASX200, in the end the AUD/USD only made a small gain last week. It’s at 0.7609 this morning and traders will be wondering if the rally is losing momentum already. More pointedly they’ll be wondering what RBA governor Glenn Stevens might say about the exchange rate when he speaks tomorrow.

The NAB economics team said in their What to Watch weekly on Friday that “all eyes will be on whether Stevens makes any attempts to jawbone the currency lower, which at $US0.76, is well above the level of $US0.65 that RBA Board Member John Edwards recently nominated as a desirable level. However, Edwards also said he would be more concerned if it was not for Australia’s good export performance. The RBA staff have been relatively neutral on the currency with RBA Assistant Governor Guy Debelle noting in Q&A Thursday that”:

Most central banks want lower currencies, to push up inflation or create a bit more activity… I don’t think we’re any different from that. But obviously everyone can’t have a depreciating currency

4. If Blackrock is right the risk rally has a long way to run. BlackRock’s Rick Rieder — chief investment officer of global fixed income for the world’s largest asset manager – has the most intuitively appealing theory of what the Fed has decided to do at the moment.

Myles Udland reports that Reider said “There’s a takeaway [from the Fed meeting] that I think is extremely important. The Fed has made the determination that the risks of letting employment and inflation run hotter is the risk they’re willing to take.”

The rationale is that the Fed knows how to handle a hot economy. But what it’s seeing around the globe, in Europe and in Japan in particular is that central banks can’t deal with an economy that slips toward deflation. That might explain why the fed did what it did better than any conspiracy theory.

5. Deutsche Bank says oil’s rally is just about short covering and now the price is back near fair value. “The recent rally in oil prices has entirely reflected a reduction in shorts from record highs,” said Parag Thattle, a strategist at Dutsche Bank in New York in the bank’s latest Asset Allocation Investor Positioning And Flows.

“From a fundamental perspective, at their lows, oil prices were at the bottom of the +/- 30% band around fair value that has marked historical extremes. The rally since reflects in part a shrinking of that extreme discount but as the dollar has fallen also an increase in fair value ($43),” he said. That’s not far off the 200 day moving average that constrained Nymex Crude last week.

6. And it’s a big week ahead for markets and traders – here’s my diary of the key events. Can stocks and the risk rally continue without the positive catalysts of last week’s central bank meetings? What about oil’s failure under the 200 day moving average. It might be a slightly quieter week but we still get the latest revision to US GDP and a host of flash PMI’s. As ever the parts keep moving. You can find my wrap of the outlook here.

And the overnight round-up of key data(courtesy BNZ Markets)
NZ: ANZ consumer confidence, Mar: 118.0 (119.7 prev)
CA: Core CPI (y/y%), Feb: 1.9 (2.0 exp)
US: U.of Mich. consumer sent., Mar P: 90.0 (92.2 exp)
US: U.of Mich. 5-10 infl’n exp (%)., Mar P: 2.7 (2.5 prev)

Have a great day. You can catch me on Twitter.

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