Asian Open: USD holds firm ahead of CPI, ASX set to mean revert?

Tuesday US cash market close:

The Dow Jones Industrial fell -84.96 points (-0.26%) to close at 32,166.92
The S&P 500 index rose 9.81 points (2.51%) to close at 34,058.75
The Nasdaq 100 index rose 158.135 points (1.3%) to close at 12,345.86

Asian futures:

Australia's ASX 200 futures are down -15 points (-0.21%), the cash market is currently estimated to open at 7,036.20
Japan's Nikkei 225 futures are down -210 points (-0.8%), the cash market is currently estimated to open at 25,957.10
Hong Kong's Hang Seng futures are down -110 points (-0.56%), the cash market is currently estimated to open at 19,523.69
China's A50 Index futures are down -28 points (-0.22%), the cash market is currently estimated to open at 13,017.56

A quick glance across FX major pairs shows that volatility has subsided compared to the recent dollar-driven rout. AUD/USD closed below 70c for a second consecutive day yet effectively flat, amidst its least volatile day in six sessions. It’s all about the US dollar over the next 24-hours, and we expect a relatively quiet day’s trade for currencies leading into it.

The US dollar is not giving up its stronghold ahead of today’s inflation print. The dollar index hovers just below 104, seemingly waiting for the greenlight via another hot CPI print to send it higher still. But the fact its consolidating at recent highs also shows a hesitancy to overcommit before the data is released, whilst central bank policy divergence and safe-haven flows continues to support it. USD/JPY continues to meander around 130 and the likely catalyst for a sustained move away from it is likely to be today’s inflation data. USD/CAD remains above 1.3000 and at a fresh YTD high.

Precious metals continue to feel their weight of the mighty dollar and are also being dragged lower by inflation expectations. Gold is at a 3-month low and clinging on to trend support from the August low at 1837.80. It’s effectively tracking the 10-year breakeven lower, and momentum currently favours a downside break of support. Silver fell to a 22-month low and shows sign of an immediate bottom.

ASX 200: Mean reversion is not always pretty

Yesterday saw the ASX 200 fall over 1% for a third consecutive day – a run not seen since June 2020. Incidentally, the last time that happened it marked a swing low. But such stats are likely best viewed on a case-by-case basis.

In this instance we saw a failed break below 7,000 before prices closed back above it. In fact, around half of the day’s range accounts for the rebound back above 7,000. Given the selloff on Wall Street is losing momentum and we saw the ASX trade fully beyond its lower Keltner band yesterday, we suspect some mean reversion is now due. Whether it is a low volatility day, choppy range or sharp turnaround remains to be seen, but we’d urge some caution of being short at these levels given yesterday’s price action clues.

7,000 is a key level for bulls to defend today and traders likely need to allow for extra levels of volatility, or step aside until volatility recedes back to ‘typical’ levels.

ASX 200: 7051.2 (-0.98%), 10 May 2022

Telecomms (0.35%) was the strongest sector and Materials (-2.38%) was the weakest
1 out of the 11 sectors closed higher
10 out of the 11 sectors closed lower
8 out of the 11 sectors outperformed the index
50 (25.00%) stocks advanced, 142 (71.00%) stocks declined

Outperformers:

+5.66% - Iress Ltd (IRE.AX)
+5.48% - REA Group Ltd (REA.AX)
+5.06% - IDP Education Ltd (IEL.AX)

Underperformers:

-15.59% - Johns Lyng Group Ltd (JLG.AX)
-8.53% - Block Inc (SQ2.AX)
-6.74% - Chalice Mining Ltd (CHN.AX)

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