Saturday, 13 April 2013

Is Japanese Wealth Heading to Australia?

Ralph Shell, Excel Analyst

Excel Markets ECN Forex Broker Demo Account Trading Contest - $10,000 Cash Prizes! - April 2013By now, Japanese savers have been fairly warned that their savings - the portion not invested in Japanese stocks - had best be parked elsewhere.  The Japanese have trillions of dollars of savings, so where is the accumulated wealth to be allocated while PM Abe and friends flood the markets with newly-printed yen?

Conventional investment banker wisdom touts local equities and commodities.  The run-up in the Nikkei 225 to the top side of 13,500 from under 8600 in mid-November has been good advice. Gold and other commodities are weak, but really, commodities and equities are hardly suitable for the aging Japanese savers.

Some Japanese yield-seeking investors are rumored to be buying bonds in the developing world, including Korea, Thailand, and Mexico.  Australian debt has also been attracting some foreign demand, partially responsible for taking the yield on the ten-year Aussie bond down over 30 basis points to 3.31%, but still a big premium to the US ten-year at 1.75%.

We wonder if some of these Japanese savings are making their way to Australia.  After trading earlier this week down to 1.0350, the Aussie (AUDUSD FXA) enjoyed a strong rally to 1.0580 before a little sell-off Friday.  Trading the A$ at the CME has also become quite popular as the total open interest is up to almost 200K contracts.  With the open interest in the yen only 215K, this illustrates the degree of interest in the Aussie Dollar.

Click AUDUSD Daily Chart to Enlarge
AUDUSD Weekly Forex Chart 12 April 2013, Excel Markets ECN Forex Broker

The A$ may be primed for some volatility in the coming week.  Thursday April 11, the Australian employment numbers were poor.  There was a loss of 36.1K jobs, the participation rate dropped to 65.1, and the unemployment rate dropped to 5.6% from 5.4.  Early Monday April 15, China will announce her quarterly and yearly GDP rate which is expected to be 2% and 8%.  Numbers stronger than these would likely give the A$ a boost.

We also have the RBA policy minutes on Tuesday.  While we are concerned about being a late arrival to the Aussie's bull party, we are inclined to be long the A$, hopeful it can take out resistance at the 1.06 handle.  If that level is conquered, the target should then be around 1.0850.

The US economic news continues to fall short of expectations.  While the first time claims for unemployment yesterday at 346K was a good number, these numbers are often adjusted later.  Friday April 12, US retail sales fell well short of expectations, as did the US M/M PPI number down 0.6%.  The consumer confidence reported by the University of Michigan plummeted from 78.6 to 72.3.  This was a nine-month low, and the biggest drop under the expected number in years.  These reports give the Fed little reason to slow their QE, and this may be weighing on the USD.

Click EURUSD  Weekly Chart to Enlarge
EURUSD Daily Forex Chart 12 April 2013, Excel Markets ECN Forex Broker

From our Commitments of Traders' (COT) analyses, we had suspected the USD had accumulated many, perhaps too many longs.  The ability of the euro (EURUSD, FXE, UUP) to gain on the USD perhaps confirms this theory.  Settlement of the Cyprus banking failure was messy and acrimonious, but despite this the euro was able to rally.  For the week, the open interest in the euro futures market was down close to 20K contracts.  Possibly, spec shorts and longs were both liquidating.  There is nothing in the weekly chart that makes us think this rally is over.
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