Asia Market Update - Carry trade expected to make a return

- Carry trade theme expected to make a comeback: Volatility in global markets is dropping with the positive stock market response to the Chinese rate hike over the weekend. Most analysts expect the carry theme to resume if the Bank of Japan reiterates its "gradual" approach to hiking rates after today's rate decision. Analysts point out that positioning data from Chicago's Commodity Futures trading shows that the unwinding of the yen carry trade has peaked, suggesting further yen losses.

- Forex: EUR/USD downside seems contained by 1.3279 minor support, but bearish divergence conditions in weekly MACD and RSI shows a medium term top could already be in place. The Aussie dollar rallied above 0.8000 against the USD, but support at these levels didn't last long given expectations of a global slowdown during 2007. Some analysts expect the yen's weakening to have a spill-over effect on the Swiss franc as both are seen as funding currencies, but we have not yet seen the CHF weakening significantly.

- Asian Equities: Asian equity markets were inspired by M&A driven gains on Wall Street. The Nikkei 225 is higher by more than 1%, gaining for the second consecutive session. The Nikkei is experiencing a broad-based rally with exporters leading gains on yen weakness. Japanese technology, steel, financials and real estate stocks are all gaining. The ASX 200 index is higher by more than 0.50%, but could not break through fibo resistance at 5895. Gains on the ASX 200 continue to be driven by miners BHP and Rio Tinto on rising copper and gold prices. South Korea's Kospi index is little changed as gains in shares of LG Philips counterbalanced losses in shares of Posco Steel. Chinese equities saw choppy trading after Chinese regulators placed limits on public companies' ability to use proceeds from stock issues to fund equities purchases. Declines in Chinese equities were driven by financial shares. The Hang Seng index is higher by more than 1%.

- Commodities: Crude oil is higher in Asian trading, but remains below $57. Spot gold is gaining for the 5th consecutive session on gains in equities. The accompanying Fed statement is expected to be dollar bearish, and this is boosting confidence to push spot gold prices higher. Shanghai copper opened higher by more than 1%, tracking gains in the LME contract.

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