Australian Inflation Numbers - What It Means for the Australian Dollar

Invast Insights

Week Commencing January 28, 2014

www.invast.com.au | 1800 468 278

This week we look at the following topics:

1.0 Hollywood films and market performance

2.0 Australian inflation numbers boost A$

3.0 ETF performance post currency moves

4.0 Gold price review – latest technical update

5.0 Weekly live market analysis sessions



1.0 Hollywood films and market performance

Most of the content in this week’s publication is based on financial analysis –

numbers, charts, statistics and economic data. We thought we would start this

first section differently. Over the past week we were drawn to a very

interesting image through social media that plotted recent Hollywood

produced films around stockbroking and how they compared with stock

market performance. The Wolf of Wall Street has just been released in

Australia and there is no doubt of some strong interest out there among

trader to go and watch.

Anecdotes are at times important to take into consideration. The market is

made up of hundreds and thousands of individuals, usually a crowd mentality

develops and this drives investment trends. Films are a great way into what

the herd is thinking – when everybody is bullish and pumped up about the

market you can see this play out through your film or television screens.

Producers won’t fund a feature film unless they know it will resonate at the


box office. When the property market is hot you see all types of auction

shows, renovation programs and experts on TV giving you their guide. When

the stock market is hot, everybody wants to be a broker or at least watch

content that glorifies them.

We don’t really care about the film, we won’t be reviewing it or making a

judgement. The jury is still split among the Invast office in Sydney as to who is

watching it. The point here is that the film itself is merely all entertainment.

What we will do though is point out the image mentioned and how the

market usually performs when such feature movies are released. The last such

film to hit screens was Wall Street where Michael Douglas made a return to

play out his sequel to his famous 1980s Gordon Gekko performance.


Image: Hollywood films on stockbroking vs. S&P500 index performance via @bondvigilanted


The chart above is not perfect, for example the second version of the Wall

Street film was actually released in 2010 at the bottom of the market. There

was a huge rally that came following this. The image points to the year in

which the film was filmed, so this isn’t exactly a compelling chart. It is though

and interesting way to look at the market, a different way. We are sure some

of you even chuckled when you saw the image above. We dedicated half of

this report on this image because we want you to have this in the back of

your mind when you hear your friends or family members mention the film.

Perhaps the market will continue rising, we have made clear our thoughts on

key stock markets in our recently released 2014 Forecast Guide, but when

everybody starts jumping on the band wagon you know it’s time to be

cautious.

We wouldn’t be surprised to see major US indices continuing to fall over the

next few weeks, there is perhaps the prospect of a pullback in the order of 5-

10%. US reporting season is underway and ramps up this week. So far as of

the time of writing around 10% of S&P500 companies had reported earnings.

http://www.invast.com.au/downloads/file/resources/2014-Forecast-Guide-FINAL-PDF-Jan-2014.pdf






Only 50% of these actually beat expectations which are below the September

level. The long term beat rate average is somewhere in the order of around

65%. Some 37% actually missed estimates. We will provide a more detailed

analysis on the actual performance of earnings next week. We spoke about

the unusually high level of earnings beating expectations the last time US

earnings were reported. It seems as though this anomaly is now starting to

revert back towards the long term average. A pullback in US markets is not

necessarily bad news but instead provides more sustainability.

2.0 Australian inflation numbers boost A$

The ‘trimmed mean’ is the key number we watch and the 0.9% quarterly

increase was much higher than anticipated. We were calling for a number of

around 0.6%, the market was close to that, some bulls were at 0.7% and so

the 0.9% final print should be read in that context. This inflation reading does

not completely put a lid on further interest rate cuts but it removes the


immediacy – perhaps pushing any chance into the second quarter of this

calendar year. We now don’t see a rate cut in February or March.

For most of the past twelve months, inflation has been a secondary

consideration for the RBA. The rise in the A$ against other currencies had

helped contain imported inflation. As the currency falls, this will reverse. We

might be seeing the first signs of this now flowing through. Inflation is still a

secondary consideration but the RBA will find it very difficult to brush this

reading off. Unless we see a 6% unemployment rate, the RBA is unlikely to cut

further. Another high quarterly inflation number this year will see the RBA

change its tone.

Bottom line: Aussie dollar shorts were completely squeezed out by the

announcement. The AUDUSD spiked by 50-60 points on the release and it

seems as though the 0.8775-0.8820 range has now broken. We think the

AUDUSD can continue to rise to around the 0.9000 range before it starts to

meet new resistance. Has the Aussie dollar turned a corner? Perhaps for the


short term! Many traders will think twice about further selling after

completely digesting this inflation read, but then again, the vulnerabilities

around the Australian economy have not completely been addressed and last

week’s worse than expected jobs number cannot be discarded either.

Our focus is now on February reporting season to see what the corporate

world thinks of the economic situation. Consumer sentiment is still declining.



3.0 ETF performance post currency moves

Exchange Traded Funds (ETFs) were one of the main beneficiaries as the

Australian dollar fell over the past few months. Our Wealth Preservation

portfolio also has two ETF exposures, one in the Japanese market through the

IJP and the other on the Australian market via the STW code. These products

have become popular as investors look at expanding the geographical

diversification in their portfolio. There is also the attractiveness of adding such

a large exposure of companies through one single trade. For example the IJP

provides exposure to around 300 of the largest Japanese companies – most of

them beneficiaries of Abe’s quantitative easing policies – through one single

trade. In out prior report we wrote the following “The other thing to consider

about Australian listed international ETFs is that most of them are unhedged.

You are effectively paying an Australian dollar dominated price but for a pool

of investments that are dominated in another currency.


So if the Australian dollar rises against the Japanese yen for example, the IJP

will see adverse movements all other things being equal. There is an

opportunity to hedge out your currency risk with Invast’s other foreign

exchange trading products and so this risk can be minimised. The time might

also be ripe for expanding offshore exposure given the strength of the

Australian dollar in recent years. If you are of the view that the Australian

dollar will fall back to say 80 US cents in three of five years, the option is there

to exchange those Australian dollars into other currencies via ETF products

where appropriate”

Below is the six month performance of ETF securities listed on the ASX and

issued by iShares. Invast does not issue any ETF products, we merely just

report on what is already offered on the market. These instruments are not

built or monitored by us, rather by iShares which is part of the Blackrock

group. You should always check the appropriateness of the product for

yourself and read the disclaimers which the issuer makes available through

their excellent website – au.ishares.com. There are other listed international

http://au.ishares.com/index.do






on the Australian market but we have stuck to those listed by iShares for

illustrative purposes. While global stock markets have remained relatively flat,

the fall in the Australian dollar has helped fuel an increase in Australian listed

ETF performance.


Image: International ETF securities issued by iShares listed on the ASX as of 23.01.14


The next six months might show a reversal in this positive currency move for

Australian investors. We’re still bullish on European markets but think it might

be more prudent to take a direct index position on the DAX for example and

hedge the currency exposure to ensure any appreciation in the Australian

dollar against the Euro does not diminish investment returns. ETF currency

exposure has worked out well over the past six months but the time is right

to change course and reconsider, particularly for those investors who

managed to benefit from recent moves.

The STW remains one of the best ways to get diversification into your

portfolio. We will continue holding this through our Wealth Preservation

portfolio. It provides exposure to the ASX200 index through one single, easy

to manage trade. Management costs are very competitive at 0.29% on an

annualised basis. The instrument isn’t issued by iShares, instead by State

Street Global Advisors, and so it doesn’t appear on the list above.


4.0 Gold price review – latest technical update

Watch full video here: http://www.youtube.com/watch?v=VRaCBaFyY2Q

http://www.youtube.com/watch?v=VRaCBaFyY2Q


There has been a lot of interest among clients over the past couple of weeks

on the gold price. We last updated our technical outlook right before

Christmas and also in our 2014 Forecast Guide. We published a video late last

week with key levels, you can watch the video by clicking the image to the

left. There are some very solid technical levels to keep an eye out for, if you

are trading gold make sure you keep these in mind.

Key points are:

• Key trend line resistance on the daily timeframe remains in play. This was

set since August 2013. Gold has been rejected in the Ichimoku cloud

resistance level.

• This creates two key rejections which is significant.

• In addition to this, a previous key support level has turned into a

resistance level. We see this at US$1265/oz. There was support here in late

December 2013. This creates three rejection indicators.


• Sellers are taking on this new price reality now. Gold is likely to trade

lower. The stochastic oscillator created a higher high but this wasn’t

replicated on the chart.

• The way to trade this is as follows – Short gold at current price levels as of

the time of writing at around US$1235/oz with a key initial target at

US$1180/oz. Then next targets are in at US$1133-1160/oz over the next two

to three weeks. Stop loss at US$1265/oz.

• We see the Risk reward ratio as attractive – twice as much the amount of

potential reward relative to the risk if the above targets are implemented.

Please make sure you enforce the stop loss level if you want to follow this

strategy.


5.0 Weekly live market analysis sessions

So what happens if the above technical analysis is out dated by the time you

read this report? Rest assured, we have thought of this. Invast is currently

running weekly live market analysis sessions in where we update all the

market action on Wednesday evenings (Australian EST) and take your

questions and answers. This is a great service which allows you to stay up to

date and ask our analyst team to help guide your trading progress. You also

have the opportunity to ask questions directly from Invast’s analyst team – a

fantastic opportunity to hear thoughts direct from the desk.

We received a great question last week from a trader who asked which

timeframe was the right one to use when trading a certain currency position.

While Invast Insights comes out each Monday, the Wednesday session is a

great opportunity to touch base between market movements. The sessions

are designed to touch on two key currency trading opportunities, we

highlight two major global indices like the Dow Jones or the DAX and then

http://www.invast.com.au/resources/webinars.aspx













we often mention about one key commodity – gold, oil or another

comparable. You can always send through any specific queries you have to

our Senior Technical Strategist Vito Henjoto by emailing

[email protected]. We encourage you to get involved in these sessions

and register online by visiting the webinar registration section of our website.

mailto:[email protected]

















7.0 Disclaimer

Please note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us.

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Risk Warning: It's important for you to read and consider the relevant Product

Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd

documents before you decide whether or not to acquire any financial

products listed in this email. Our Financial Services Guide contains details of

our fees and charges. All these documents are available here on our website,

or you can call us on +612 8036 7555. CFDs and Foreign Exchange are

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General Advice Warning: Being general advice, this newsletter does not take

account of your objectives, financial situation or needs. Before acting on this

general advice you should therefore consider the appropriateness of the

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*Distributed with the permission of Invast.com.au

Investor Relations

Australian Inflation Numbers - What It Means for the Australian Dollar