Aussie eyes 106; Chinese CPI in frame

The Australian dollar recorded solid gains overnight following yesterday’s Chinese trade data. An upside inflection was set in the ensuing period of the trade data and buoyant risk trends overnight provided consistent buying activity with price action now flirting with 106 US cents.

Markets were suitably encouraged after Chinese exports increased at a yearly pace of 14.1 percent in December, while imports – a gauge of domestic demand – rose 6-percent. The trade surplus widened to $US31.62 billion in December, outpacing expectations of a $US20 billion surplus.

Upbeat sentiment from both sides of the Atlantic kept the momentum alive overnight, with equity performance, Euro price action and optimism surrounding China’s economic prowess keeping buying activity in play. The greenback’s diminished appeal across the board exacerbated the upside with the closely watched EURUSD pair leading the way higher.

Market participants will now watch for the next piece of critical feedback from the region with inflation data on the docket. China’s consumer price index for December probably rose to 2.2 percent in annual terms according to economist’s estimates, up from 2-percent in November. Producer prices in the region are expected to fall 1.8 percent from -2.2 percent. One would expect to see subdued inflation growth give China-contingent currencies such as the Aussie the impetus to push higher, but on the flip slide a deviation above estimates may suggest less scope for further policy easing from the region, in turn provide short-term headwinds for the Aussie.

At the time of writing the Australian dollar is buying 105.95 US cents.

Euro leads risk offensive

The big moves of the evening came from the Euro with a series of positive themes to guide the way.

A well-attended Spanish auction set the scene for Euro strength with Spain selling EUR5.82 billion of debt, in excess of the EUR5 billion target. For the first time since March 2012, benchmark 10-year yields fell below 5-percent. Italy also enjoyed solid demand at auction overnight, signaling to markets the periphery may finally be on the path to recovery, albeit at a snail’s pace.

As widely anticipated, the European Central Bank left the refinance rate on hold at 0.75 percent overnight and made no change to the deposit facility rate which currently stands at zero percent. While noting “considerable” progress in the region, ECB President Mario Draghi maintained a realistic view of the economy, warning “the risks surrounding the outlook for the euro area remain on the downside.”All in all, we have signs that fragmentation is being gradually repaired, but all in all, this is not feeding through to the real economy yet,” Mr Draghi added.

On Inflation, the bank expects prices will fall below 2-percent this year, receding from 2.2 percent late last year. In essence, while another refinance rate cut is not out of the question, it does appear Draghi and Co will hold fire given the current level of progress seen, in response markets are pricing in less of a chance of a near-term rate cut.

After briefly cross the downside of $US1.30 late last week, the Euro’s enjoyed robust support overnight with a break to the upside of two big figures to highs of 1.3267. The Euro led the way against the greenback overnight, while forging fresh 18-month highs against the Yen.

‘Abe trade’ back in full swing

After a period of consolidation, the Yen hit the wall overnight, unwinding early week gains against major counterparts. It would seem the ‘Abe trade’ is back in full swing with solid losses noted against major counterparts from the Kiwi to the Euro. The benchmark USDJPY pair also forged fresh highs not seen since July of 2010.

There’s little use for the Yen at this juncture, with buoyant risk trends combined with Prime Minister Shinzo Abe’s pro-stimulus agenda providing little in the way of sustained respite.

At the centre of the Yen’s weakness remains Prime Minister Shinzo Abe’s stimulus agenda, with the Bank of Japan expected to the adhere to a new 2-percent inflation target at this month’s policy meeting. Markets are also pondering the likelihood of the Bank expanding its balance sheet for the second consecutive month which appears to be a likely scenario should they adopt new inflation targets.