Traders turn decidedly defensive

15.04 AEST, Monday 23 July 2012

Traders turn decidedly defensive
By Tim Waterer (Senior Trader, CMC Markets)

Spanish yields rising over the psychological 7% level has seen risk-assets take a turn for the worse, with traders turning decidedly defensive now that European debt issues have again dimmed the mood.

Given the latest flare-up in Spanish yields and renewed alarm over the country’s ability to service its debt, the Euro looks to be living on borrowed time trading above 1.20 against the US Dollar in light of what appears to be further trouble down the road.

As traders are again preoccupied with Spanish woes, the US Dollar is again the prime recipient of safe haven flows in the currency market. With the HSBC Chinese Manufacturing PMI reading due early in the week, a poor result here could exacerbate the selling of higher yielding currencies.

While the AUD faces a potential hurdle in the Chinese data, domestic focus will be squarely on Wednesday’s CPI print. How the inflation number reads could effectively provide us with the RBA’s August rate decision a few weeks in advance, particularly if the data comes in a good distance either side of the 0.6% forecast.

Today’s PPI data came in on the high side (0.5% vs 0.3% forecast) however this had little impact on the AUD which was already tracking lower amid slumping Asian equity bourses. The AUDUSD rate has fallen over half a cent today with market attention firmly focused on European debt. The currency has found some support around the 1.03 level, however if we have another night of heavy selling on US markets a decline to 1.0220 is likely.

It was a tale of woe for the Australian sharemarket to start the week, with a resurfacing of Eurozone fears derailing our resource stocks in particular. Mining giants BHP and RIO bore the brunt of the selling, with traders turning morose over the global growth outlook in light of the situation in Spain.

Traders around the globe appear to be suffering an all too familiar ‘anxiety attack’ on fears that Spain is on course for a financial calamity, and this sentiment was played out on the ASX200 today.

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