Vantage FX | US and Aussie dollars rise on data | 2nd November 2012

Stocks were higher across the board overnight which is good news for Australian investors who had to watch the ASX 200 fall right out of bed late yesterday afternoon for no apparent reason. The strength was driven by better data in the US and China’s move to pump $60 billion of liquidity into their markets this week.

This chinese stimulus along with the move of the Chinese official PMI from the contraction zone to 50.2 expansion zone saw the Shanghai composite blast higher up nearly 2% yesterday. There was a raft of PMI data released last night – too much to go through here this morning but I like the way the Wall Street Journal summed up the manufacturing data we have seen in the 24 hours or so because I think in a couple of lines they explain what the market is thinking,

Manufacturing in much of the world remained in contractionary territory in October, but there were signs of hope as China and Germany returned to expansion and U.S. growth continued.

So when the ISM in the US moved to 51.7 from 51.5 last month and against expectations of a fall to 51.0 it seemed to confirm to investors – overnight at least – that the global economy may have stopped deteriorating. Also helping the positive tone was the release of the ADP private employment survey in the US which showed that 158,000 workers were added a big increase from the 88,000 that was reported last month. Weekly jobless claims fell 9,000 to 363,000 last week.  Also helping market sentiment was the increase in Consumer Confidence from 68.4 last month to 72.2 which is the highest level since back in February 2008 – before Bear Stearns before Lehman Brothers – truly amazing.

But the European situation has started to deteriorate once again with Reuters reporting that a Greek court said that

Greek pension reform demanded by foreign lenders may be unconstitutional, a Greek court ruled on Thursday, in a setback to the government’s efforts to seal a deal on an austerity package needed to secure aid.

The Court of Auditors, which vets Greek laws before they are submitted to parliament, said measures such as increasing the retirement age by two years to 67 and cutting pensions by between 5 and 10 percent could be against the constitution.

The Irish PM also took the ball up to German Chancellor Merkel as to an Irish Bank bailout which was interesting to watch.

Stocks

So with the data not getting worse and hopes that the China and other markets are stabilising stocks were higher in much of Asia which buoyed European bourses. At the close of play the FTSE was up 1.37%, the DAX 1.03% and the CAC up 1.35%. Madrid and Milan also both benefitted from the ebullient tone.

All of which contributed to a better open in the US and the S&P and other markets have been in the black from the opening bell posting solid rises. At the close the S&P 500 was up 1.09% to 1427 and as you can see in the chart above if the S&P can get through the old trendline at 1432 - which is never easy – then it might run a bit further. The Dow closed up 0.89% and the NASDAQ was up 1.25%.

In Australia our SPI200 contract was looking very wobbly late yesterday afternoon having broken the recent uptrend but it has been rescued for the moment by the action overseas. 4425 is the key downside level I am watching.

FX Markets

The better data in the US and the reemergent troubles with Greece combined to knock the Euro of its pedestal. But it wasn’t a big 24 hours for the EURUSD with a range of just 1.2924 to 1.2982 and it now sits at 1.2940ish as I write. More interesting for me is the action in EURGBP  and I’m watching to see if 79.90 gives way as a sign we have had a clear break of the recent uptrend.

Elsewhere, besides the Australian Dollar, it was a tale of US dollar strength. The Pound reversed aggressively of the highs from yesterday and sits at 1.6122 which tempers my outright bearish on the EURGBP chart above unless or until the level highlighted breaks. Against the Yen the USD did better as well rising back above 80 from yesterday’s low at 79.75 to sits at 80.13 presently.

For the Aussie dollar the wall of selling at 1.04 gave a little ground and the high printed at 1.0409 overnight which was roughly the high from a couple of weeks ago. My level for a break of the range remains 1.0420 (simply 1.0410 + 10 points)  but it has now clearly breached the roofline of the recent wedge formation and if it can get through the 61.8% retracement of the August/October fall at 1.0442 then it is off to the races.

Rationally we know that the Aussie shouldn’t be here based on so called fundamentals but the reality is that things have changed for the Aussie and the perception that offshore investors have of it and Australia are different. This might seem weird after all these years of the float but we’ve never had a global recession the likes of the GFC since the float and as I oft write the Aussie is simply the least ugly global currency out their at the moment. It seems the investors think the alternatives all look like Schrek.

Commodities

Crude was 1% higher after the EIA said US oil inventories fell 2 million Bbls against expectations that in the market for a decline of 1.7 million Bbls. Gold rose just a little to 1722 oz and the Ags were all higher as well with Corn up 0.43%, Wheat up 0.43% and Soybeans up 0.99%. Copper was up 0.6%.

Datawise Nothing else really matters except the non-farm payrolls tonight. This is always the most important, or at least most watched, data release of the month but there is room for noise in tonight’s number given the change in compilation and the fact that whatever the release that this will also then be factored into expectations about the outcome of Tuesday’s election for the US President – so it could be a little scatty and volatile in trade tonight.

Please note also that this weekend the US changes its timezone so the close of markets will be 8am EDT time from now on.

Thoughts, comments, queries together with frank and fearless feedback all welcome. I’m happy to answer questions or comments on the comment stream wherever I can

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