Due for an Aussie dollar/Japanese Yen Pullback
It's going to be an incredibly interesting week in Australia. The same 'periphery to the core' dynamic could apply here, internally. That is, you could see even more money move into high-yielding bank stocks and out of the riskier corners of the market. This would confirm recent trends.
By the way, the big four banks now make up 30% of the market capitalisation of the ASX/200. They haven't been that big a piece of the market since 2003, around the time the commodities bull market started to get priced into resource stocks. Australia's banking sector is already oversized in terms of assets to GDP. But now the banks have shiny huge new market capitalisations to reflect their 'flavour of the day' status.
But our colleague Murray Dawes reckons the 'periphery to the core' capital flow pattern could hurt the Aussie market as well. This is where external forces apply. The shenanigans in Europe have already caused ructions in the foreign exchange markets. If traders take of their 'risk on' bets, you get big and ugly moves in terms of money heading for the exits in Australia.
One of the charts that will 'signal' what's going on in capital markets is the Aussie dollar / Japanese Yen exchange rate chart. Murray's been watching this along with your editor. The chart below is ours. But the conclusion we reached through our interpretation is the same as Murray's. Look out below!
This is a six-month chart. It shows you that ever since Shinzo Abe became the new Prime Minister in Japan, the Yen has weakened against the Aussie dollar. That weakness coincided with an 18% rally on the ASX/200 from the November lows. But are the fun times over?
Well, after ten straight positive sessions - the longest winning streak in 16 years - the Dow Jones Industrials finally closed down on Friday. The markets are probably due for a pull-back anyway. The Aussie Dollar / Japanese Yen exchange rate is also due for a pull-back. Today, it's all being pulled back.
The question is, how far will we pull back?
Regards,
Dan Denning
for The Daily Reckoning Australia