It's all about the banks

Strong buying of the big four banks has been the main driving force behind the 4% rally in the ASX 200 index this week. Buying of bank shares has had some real urgency about it over the past three days. You’d have to think that short covering is in the mix, fuelling this rally in bank shares. Whether or not this continues today is likely to hold the key to how the index finishes the week.

Another strong rally in the Aussie Dollar overnight will offset some of the benefits of firm commodity prices for investors. After last night’s gains, the Aussie Dollar is now within sight of a key zone of chart resistance that begins with the October and December peaks around .738.

The catalyst to renewed confidence in the Aussie Dollar this week was better than expected GDP growth. Solid growth in household consumption underpinned the December quarter growth and Aussie Dollar bulls will want to see this carried through into the January retail sales data due for release this morning.

Overall, it would not surprise to see traders finish the week on a cautious note ahead of China’s Peoples’ National Congress this weekend and US jobs data tonight. The question of where China’s authorities stand on the balance between short term economic stimulus and longer term structural reform is a key issue for world markets. Markets will be looking for further insight into this in the release of economic growth targets and the draft five year growth plan.