Aussie Basks in Carry Trade Spotlight

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Market Drivers for April 10, 2013
Chinese Trade posts surprising deficit
Italian auction goes off without a hitch
Europe 1.10% Nikkei 0.73%
Oil $93.96/bbl
Gold $1580/oz.

Europe and Asia:
AUD Westpac Consumer Confidence -5.1% vs. 2.0%
NZD NZ Card Spending -0.5% 0.3%

North America:
USD Fed Releases Minutes from Mar 19-20 FOMC Meeting
USD Monthly Budget Statement 12:00

Its been another generally upbeat day for risk FX in Asian and early European trade as EURUSD popped through the 1.3100 barrier while Aussie continued to make its way above 1.0500 amidst better tone in the equity markets with European stocks rising by more than 1%.

The economic calendar remains relatively quiet with only Chinese trade data as the main event on the docket. Chinese trade numbers surprised as the country recorded a deficit in March of -0.9B versus a 15.2B surplus forecast. The news however did not cause much of a stir in the market.

Chinese exports rose by approximately 10% from a year prior, although growth to Europe and US clearly slowed. It was however the unexpectedly large jump in imports that created the surprising deficit. Imports increased by more than 14% fueled by sharp demand for raw materials.

The rise in imports was actually seen as positive by the market as it was further proof that Chinese internal demand remains robust and continues to underpin global growth. The AUD/USD responded in kind hitting a session high of 1.0527 on continued improvement in investor sentiment. Australian Treasurer Wayne Swan noted that the pair was “defying gravity”, but the market continues to bid the Aussie.

Part of the unit’s attraction is the revived interest in the carry trade. With Australian rates likely to remain unchanged the interest rate differential between the Australian dollar and the Japanese yen stays in place. As the yen continues to depreciate investors are flocking to the AUD/JPY pair in order to collect positive carry while watching their positions appreciate. This has created a virtuous cycle for the longs as momentum has carried the pair well above the key 100.00 mark over the past few days and has lifted the AUD/USD through the 1.0500 figure.

In Europe, there was very little news on the economic front, but the better than expected French Industrial Production which came in at 0.7% versus 0.6% eyed along with a strong Italian T-bill auction provided support for the euro. The pair has now closed the gap down open from several weeks ago in the aftermath of Italian election and has now fully recovered the losses. It faces some resistance at the 1.3150 level, but if it can clear it there is little to prevent it from shooting towards the 1.3300 figure on a short squeeze and surprising many perma euro bears in the process.

In North America today the only key report is the key release of the FOMC minutes. As our colleague Kathy Lien has noted, “We believe FX traders should take the FOMC minutes with a grain of salt. The minutes will be from the Fed meeting held between March 19th and 20th. This was right after the huge jump in non-farm payrolls and the big rise in retail sales so the Fed will most likely be more optimistic with talk of varying asset purchases gaining traction. Since then, we have seen a huge pullback in job growth, decline in consumer confidence, slower manufacturing and service sector activity.” If the FOMC minutes show no signs of the Fed curtailing the QE program, both the EUR/USD and the AUD/USD could make fresh highs as the day proceeds.

Boris Schlossberg
Managing Director

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