The Return of AUD/USD Carry Trade?

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Market Drivers for June 6 2014

Markets very quiet as half of Europe on holiday

Chinese Trade data up smaller imports

Nikkei 0.31% Europe .16%

Oil $103/bbl

Gold $1254/oz.

Europe and Asia:

CNY Trade Balance 35.9B vs. 22.5B

JPY Final GDP 1.6% vs. 1.4%

EUR Sentix 8.5 vs. 13.5

North America:

CAD Housing starts 8:30 AM

Markets were extremely quiet on the first trading day of the week, as half of Europe and part of Asia were out on bank holiday and event risk calendar was practically barren. Aussie was the standout of the night as the pair continued to climb above the 9350 level benefiting from the global hunt for yield.

Over the weekend Chinese Trade was released with report showing a significantly bigger surplus than forecast. Chinese Trade Balance increased to 35.92B vs. 22.6B eyed with the gains being led primarily by exports which jumped an impressive 7.0%. Imports declined by -1.7% raising concerns about domestic demand in China, but the headline figure was not as weak as it appeared as May the year prior was a seasonally strong month for imports.

Overall the Chinese Trade data echoed some of the other recent economic releases from the region that essentially point to a stabilizing economy that is benefiting from prick up in global demand. Against such a background it is easy to see why the the Aussie ha continued to gain momentum. As the highest yielder in the G-20 universe with deep, liquid markets for its bonds, Australia remains the primary attraction for global investors starved for yield.

In fact some analysts including Morgan Stanley now forecast the possibility of Aussie reaching parity by year end as yields remain low in both US and Europe. While parity is certain to raise the ire of Australian monetary authorities who may even respond with a rate cut in such a scenario, the Aussie certainly looks strong on a relative basis. It has performed particularly well against the euro and could gain further strength this week if the labor data on Wednesday proves supportive. EUR/AUD flirted with the 1.4500 figure last week in the wake of the ECB announcement and could break that level this week if Australian labor data shows steady job growth.

In North America the calendar is very quiet today as well and trading may remain lackluster throughout the day with currencies holding their narrow ranges. US yields appear to have stabilized above the 2.50% level and if they can continue their recovery above 2.60% the greenback may see a modest bid with USD/JPY inching towards 103.00 while EUR/USD slides back towards 1,3600 as the day proceeds.

Boris Schlossberg
Managing Director

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