Positive developments hard to come by

15.50 AEST, Wednesday 25 July 2012

Positive developments hard to come by

By Tim Waterer (Senior Trader, CMC Markets)

The cupboard has been bare this week when it comes to positive economic developments, with traders instead faced with underwhelming earnings in the US and more alarm bells ringing over Greece and Spain.

In the currency market, anything not named the US Dollar or the Japanese Yen have been staring at considerable selling pressure, with higher yielding currencies not being the most enticing place to be given the heightened alert status of financial markets so far this week.

The day has been nothing if not interesting for the Australian Dollar (AUD), with the currency trading indecisively on the back of the latest inflation print. The 0.5% reading was slightly below the 0.6% forecast, which saw the AUDUSD decline initially, however the Aussie was quick to bounce back and head north past the 1.02 level. It appears there was an initial misread by the market on what the result suggests for the August interest rate decision.

While the inflation reading leaves the door ajar for an August rate cut, the door is far from wide open as the result will likely give the RBA the luxury of maintaining a ‘wait and see’ approach over coming months. A softer reading closer to the 02% or 0.3% region would have been far more convincing in terms of RBA action in August than the actual 0.5% print witnessed today.

The IMF assessment of future Chinese growth also may have allayed some fears today and provided the AUD with some comfort, particularly coming on the back of Tuesday’s decent PMI reading. However if global equity markets continue the sell-off the AUD will be hard pressed to make it back to 1.03 this week, unless we see trading sentiment take a turn for the better.

Given there has been three consecutive sessions of triple digit falls on Wall Street, the Australian market was always going to face a tough task of making any sort of headway today. The buying momentum from last week has been replaced with heightened concern over the size of a potential Spanish bailout. Given the recent escalation in Spanish yields to extremely unnerving levels, it is starting to shape as a question of ‘when’ not ‘if’ a sizeable bailout will be sought. This scenario does no favours for ‘risk’ assets, which is why equity markets have floundered this week.

However all told, declines on the ASX200 today were quite shallow by the close. What is clear though is that the market is devoid of positive drivers and this was played out on the index performance today.

ends

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