Asia Session: Commodity Currencies Still Looking Shaky

Commodity currencies regained some ground early in the session after sliding overnight on the back of Chinese commodity demand concerns and a persistently high oil price. The comments from BHP yesterday regarding Chinese demand for iron ore are continuing to play havoc today with mining stocks in Australia, with the basic materials sector driving the entire Australian equity market lower.

Given the nature of Australia’s two-speed economy which is being support by a mining boom, it is understandable how concerns about future growth in this industry would weigh on the overall market. Currently, non-mining sectors in Australia are under immense pressure from high interest rates, an over stretched housing sector, fiscal consolidation and, most importantly, a high Aussie dollar. The dollar is becoming a massive pain for trade-exposed sectors, which are being forced to undergo structural change in order to remain competitive. Apart from the obvious negative implications for exporters, Australian’s are now choosing to purchase goods from overseas to take advantage of the high Aussie, which doesn’t bode well for domestic producers.

Early in the session, New Zealand released current account figures for Q4 which showed a deficit of NZD2.763bn (exp. NZD-2.825bn), up from a revised deficit of NZD4.751bn for Q3. The GDP to current account ratio now stands at -4%, which is in line with what the market was expecting but higher than the previous -4.3%. The drop in the current account deficit stems from a relatively strong performance from NZ’s trade sector towards the end of last year despite the slowdown in global demand. Looking ahead, however, the elevated currency will likely keep the current account deficit wide.

In other news, Westpac’s Australian Lending Index for January slipped to 0.6%m/m from a revised 0.7%m/m increase previously. Also, net migration figures out of New Zealand came in at -440 for February, modestly higher than the previous month’s revised figure of -620. In Japan, the All Industry Activity Index for January came in slightly lower than expectations at -1.0% (exp. -0.7%), and much lower than the previous month’s revised figure of 1.6%.

It was not a good day for equity markets in Asia, with the Nikkei 255 down around 0.59% at the time of writing and the ASX 200 closing around 0.48% lower for the day. As previously mentioned, the basic materials sector dragged the ASX down, with the sector closing around 1.06% lower.
The initial gains for commodity currencies were quickly eaten away later in the session, which sent the Kiwi to a low of around 0.8179 against the dollar, whilst AUD/USD slipped below 1.0500. Yet, AUD/USD managed to find some support around 1.0480, but we expect the pair may run into some resistance around 1.0496 (overnight resistance level before the break higher early in the Asia session).

Tonight all eyes will be on the UK for the release of MPC meeting minutes and the annual budget at 09:30GMT and 12:30GMT, respectively, before turning to the US for Fed Chairman Bernanke at 13:30GMT.