Vantage FX | Markets reverse, Stocks, Euro and AUD rally| 31st October 2012

Fear of Hurricane Sandy’s impact and the uncertainty surrounding it drove money out of equities and into safe haven assets like the US dollar and bonds on Monday but Europe seems to have decided that things weren’t that bad after all and so equities were higher, bond prices fell (yields up) and the US dollar was weaker last night.

Obviously the recovery on the East coast of the US is going to take some time, particularly if you think about the sheer volume of people and industry that is concentrated in this part of the US. So while the New York Stock Exchange and US Bond markets will be open tonight, Wednesday their time, the disruption to economic activity and the cost of recovery is bound to be significant. Indeed as Sandy has slowed down and headed inland it is still impacting on a big swather of the US.

But markets often buy rumours and sell facts and they will move swiftly on as the focus turns to the US Presidential election and non-farm payrolls over the next 12-24 hours.

Stocks

On the data front there wasn’t much good news in Europe with further confirmation of Spains troubles with GDP for Q3 contracting  0.3% versus the 0.4% expected but year on year it is now down 1.6% and of course we know unemployment is 25%. German unemployment rose for the 5th month in a row to 6.9% seasonally adjusted and European consumer confidence and the business climate surveys both showed a further deterioration.

But with Wall Street closed again it was up to Europe to set its own course and even though the economic news was poor across the board it was another example of Hurricane Sandy’s buy the rumour sell the fact trade and at the close of play the FTSE in London was up 0.95%, the DAX rose 1.13% and the CAC was 1.48% higher.

Indications are that US stocks will rally when they open tonight and that the Australian and Asian markets will also be quite a bit higher. The SPI200 has regained the recent uptrend line it fell through and for the moment the uptrend remains intact.

FX Markets

The US dollar weakened overnight across the board and in particular the EUR found support again in the 1.2880 zone with a low overnight of 1.2884 before it rallied very sharply up to a high of 1.2983. As you can see in the chart below this rally has dragged the EUR back inside the uptrend and has, once again, forestalled a trend change and downside extension – so it is that EUR simply remains in a range and unless or until it takes out 1.2880 at the very least and the 200 day moving average at 1.2834 and range bottom at 1.2800 we wouldn’t be getting too bearish at all.

Another EUR cross worth looking at is the EURGBP rate which you can see is trading very nicely in a 3 month or so uptrend. EURGBP is a great cross to trade I reckon so we’ll be keeping an eye on this one too. If the trend breaks it would be a big signal for EURGBP and the EURUSD most likely.

Elsewhere in FX markets the reaction to the BOJ’s “disappointing” addition of just ¥11 Trillion was another example of buy the rumour sell the fact in USDJPY. Also a lesson in how markets can react irrationally – at least in a fundamental sense. Take this quote from Reuters I saw this morning for example,

“It was a very skeptical response to the BOJ policy meeting, made worse by the fact they have revised lower the growth and inflation outlook,” said Jane Foley, senior currency strategist at Rabobank. “That has seen the yen unwind a lot of the softer tone we saw going into this meeting.”

Sure it’s buy the rumour sell the fact but the idea that the Yen strengthens because the BOJ lowered their growth and inflation outlook is just fundamentally back to front. But that is the conundrum that is FX markets sometimes and why price action is so much a part of my analysis framework.

For the Australian Dollar it was constrained by that roofline resistance again – very nicely actually as you can see above. Yesterday’s new home data really highlighted the difference between what we are seeing and experiencing here in Australia economically and what the world see when it looks at the Australian dollar. Its an important point to remember because economics does not always drive currencies of FX markets. For the moment however like the EUR AUDUSD is really just trading a range with sellers around 1.04 and buyers around 1.0200/30 and below here the range bottom at 1.0150.

Commodities

Crude was up a bit overnight rising 0.46% to $85.93 Bbl as it looks to be building some support for a short term base as the downside momentum wanes. The Ags were all up with Corn rising 0.68%, wheat up 0.79% and soybeans rose 0.62%. Of most interest to me is the Gold price at the moment – while it only rallied 0.34% last night to $1,713 oz I wanted to flag a long term chart that suggests – on a monthly time frame – that gold has substantial downside potential. Obviously this is going to take some time and it is also counter to what the gold bugs would have us believe but its worth keeping an eye on.

Datawise today we see the release of Building permits and Private sector credit data in Australia – both of which are likely to print on the weaker side of the ledger.

NB: Please note all references to rates above are approximate and should not be used for trade reference. 

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