You would think that the balmy summer weather that hit London this weekend has permeated the general mood of the financial markets. Risk on in general, equities buoyant, and our only care in the world is who speaks next at the Fed. But as we mentioned last week we think the market is getting a bit too over excited about US rate rises. Mr Dudley started to swing things back to the dove camp on Friday but today we have the leader of the hawks, Big Bad Beardy Ben billed for later. (As an aside, every time anyone mentions Dudley, TMM can’t get Mr Dudley from the the Little Britain sketches out of their minds. In that analogy, who is Ting Tong? The US economy?).
One of the biggest and most obvious winners of the USD rates up trade has been USDJPY which has seen the market getting even more excitable as it perceives an option driven black hope in the 85.00 to 90.00 area which will suck in all those venturing near. Basically, we think the market is now fairly well positioned for an up move so the pain trade would be back below 83.50.
Elsewhere, TMM are starting to think that they have seen a top in more than just copper. Colour from physical traders in China is indicating that rate rises in onshore markets are forcing a lot of inventory financing deals to be unwound and physical copper is hitting the market, we are now hearing similar stories about Zinc too. TMM are of the opinion that as long as China rates are rising and fixed asset investment is being slowed that it will be very hard for industrial metals to continue their march upwards even if the markets appear tight. Which then leads us on to think about the AUD. There is an awful lot going for the Aussie, but if we are looking for metals to top then shouldn’t we be expecting AUD to roll too? That AUD vs Base metal commodity index chart is starting to show some interesting divergence.
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And putting the above 2 thoughts together shouldn’t AUDJPY see a pull back? It’s managed a 17% rally from its post Earthquake lows now certainly looks like the tightest wound of the Aussie elastic crosses if there is to be a snap back.
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As we are a bit bored we think AUDJPY may well be an interesting sell on the sidelines to liven up our otherwise dull day.