Outlook for Europe: USD winning race to the bottom

16.29 AEDT, Tuesday 9 October 2012

Outlook for Europe: USD winning race to the bottom

By David Land (Head of Analysis, CMC Markets)

The resilience of several equity markets in the Asian region since the open shows there is plenty of capital looking for a home in risk assets.

The rally in the Chinese market has driven gains across the Asian region and may be enough to reverse the weakness of the previous sessions in a number of European and US markets. The gains in the commodity currencies like the AUDUSD and the NZDUSD show that there is quite a degree of ‘risk-on’ impetus in the session today. In addition seeing the commodity sphere performing strongly isolates the flow of money away from the USD and into risk assets as well as those defending against a weak USD outlook.

The Australian dollar has found solid technical support as it continues its broad sideways march. There are many who suggest that there should be more weakness due to expectations of more accommodative monetary policy but it’s not the way the money is flowing. While the markets are sometimes perplexing it’s no good trying to say they are wrong. The wider currency space has also gained ground against the USD but the GBP and the EUR have been much more modest in their gains compared to the AUD, NZD and CAD.

The ‘race to the bottom’ for currencies is being won by the USD. Quantitative easing packages have the world expecting long term weakness in USD and are looking to park money in equity markets and gold.

Overnight there were periods of quite significant weakness in the gold price which saw it slip back inside its recent volatility range. Given the wider positive sentiment for gold it wasn’t surprising to see a sharp bounce in the price. This will inspire gold traders but there is quite a lot of technical resistance above. This may mean the coming weeks could be largely directionless for the price of gold.

Energy stocks look likely to be the movers in the day ahead. During the Asian session there was a great deal of interest with these being stand out areas in Hong Kong and Australia. It was even one of the few sectors in the US to close higher.

Oil prices have been less than exciting but it hasn’t stopped equity buyers moving into the sector. It’s interesting that in an environment where the IMF is ratcheting back growth expectations an area of the market considered correlated with economic prospects.

The European and US sessions are currently showing positive signs for the day ahead. Futures have been positive since early in the Asian session with a number of markets gaining momentum as the day wore on.

The US earning season has the potential to shift direction very quickly though so there is a degree of nervousness associated with that. Recent sessions in the US in particular don’t show traders and investors heading for the door regardless of what is expected for the Q3 numbers.
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