‘Safety first’ trading is the order of the day

15.10 AEST, Friday 6 July 2012

‘Safety first’ trading is the order of the day
By Tim Waterer (Senior Trader, CMC Markets)

Financial markets are experiencing a quandary at the moment trying to determine the appropriate course of action to take in response to central bank easing measures. The actual announcement of monetary easing gets warmly received, however the underlying reasons for the loosening of conditions has traders second guessing whether it is wise to go long in this market given the accompanying gloomy assessment by policymakers.

The BOE, ECB and PBOC moves have in essence given traders a greater puzzle to solve in regards to whether being long, short or sidelined is the smart choice at this juncture.

US payroll numbers and the subsequent US Dollar reaction will be the prime driver of key commodity prices like gold and oil to end the week, with the employment result likely to form the premise of the QE3 debate heading into the next Fed meeting.

The Australian Dollar has taken a few looks beyond 1.03 this week before retreating back to the 1.0240-1.0290 range. The Aussie is holding up better than most currencies against what is a stronger US Dollar in the lead up to the Payrolls data. However, downside risk for the AUDUSD rate exceeds upside risk heading into the US session, given the possible scenarios of the Payrolls result.

A reading of over 100k of jobs creation will likely boost the Greenback as QE3 expectations would diminish, while a print closer to 50k would be a negative for risk assets on fears the world’s largest economy may be stalling. If we do see a soft payrolls number, how much heart the market takes from an increased likelihood of QE3 will be critical in terms of softening the blow.

The natural tendency for traders is to be in a ‘safety first’ frame of mind heading into US payrolls data, and this combined with the weak offshore lead had the ASX200 trading in negative territory today. Renewed concern over the state of Chinese economic health as instigated by the surprising timing PBOC rate cut created selling pressure among the mining stocks today, with BHP and RIO being a particular drag on the broader index. The conservative trading pattern epitomises how investors are mindful of not wanting to be caught on the wrong side of a risk-off move if US payrolls data sets any more alarm bells ringing.

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