Taper related weakness likely to flow through to market open

Taper related weakness likely to flow through to this morning’s market open

By Ric Spooner (Chief Market Analyst, CMC Markets)

Sellers are continuing to take advantage of attractive stock valuations while buyers remain cautious as solid US retail sales data increases the probability that the Fed’s taper program is about to begin.

US shoppers cast aside concerns over the government shutdown to string together the best couple of month’s gains in core retail sales since early last year. Low rates, declining gas prices and rising house values finally appear to be chipping away at the funk that’s dominated the consumer mood since the GFC. This improved data led to another day of taper related weakness in US stocks and this seems likely to flow through to this morning’s opening on the local market.

Improved retail sales led to a stronger $US overnight with the Aussie dollar being the weakest against the Greenback amongst all of the G10 currencies. Although the US economic data has markets looking forward towards Fed tightening, the Aussie was impacted by a rising unemployment rate. While jobs growth here remains insufficient to employ the growing work force it’s likely that the RBA will maintain its easing bias on interest rates and this is a negative for the Aussie Dollar.

Downside momentum for the Aussie was also assisted by timely remarks from both the Prime Minister and the RBA Governor. Mr Abbott highlighted the possibility that the recent injection of funds to the RBA balance sheet could be used to buy currencies and sell the Aussie Dollar. Markets are expecting that the RBA will be selling Aussie to buy foreign reserves and the RBA governor again reminded markets of his view that the currency needs to decline to the mid-eighties against $US.

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