Vantage FX | Stocks drag Aussie dollar higher – bounce has legs | 19th November 2012

I have been on the bear side of the trade for stocks since the start of earnings season but as it wraps up and the jury is in with a tale of missed earnings and revenues so to might the sell off that accompanied these poor results also be trying to wrap up. I say trying because there is no real evidence that this is the case just Friday’s trade and a feeling that on the dailies at least markets have become stretched.

Equally though a number of people who’s thoughts I respect have been suggesting that perhaps it is time for a bounce.

Indeed even though the weekly close was below my 1362 level for the S&P 500 I have to note that in Friday’s trade for the S&P 500 – and many markets – was, in a technical sense,  a very bullish day with a lower low and higher high than the previous day and a pretty strong close – technicians call it an outside day and a bullish one. Equally I have been watching apple closely and it too had a big reversal.

Now for the trend followers out there who think that I might be mad and that the trend is still currently down for the S&P and for Apple let me say you are right and my trend following systems are still short. But not everyone is a trend follower nor do they have the psychological profile to be one and the point of this morning’s note is to simply flag that there is now a high probability that we can use Friday and Friday’s price action as a tradeable low for a counter trend rally.

What drove the market higher on Friday for this set up was the break up of talks between the Key House and Senate leaders which were concilliatory and “constructive”. Republican Leader John Boehner sounded very confident that a deal can be done in the post talk press conference and at that very instant markets popped sharply higher and although they dipped again they were strong into the close.

Summarising the tone was a quote in the Wall Street Journal from over the weekend,

“If you continue to see reports like this, and not just talk but hard numbers and hard plans, the market will get a little more comfortable that something constructive will happen,” said Ryan Larson, head of equity trading at RBC Global Asset Management.

There is that word constructive again – I’m guessing you’ll read that more than once today and this week.

Stocks

So at the close US markets had a good run with the S&P 500 up 0.48% to 1359, the Dow was 0.37% higher and the NASDAQ rose 0.57%. Data out earlier in the day was on the weaker side with Industrial production down 0.4% against the pundits expectations of a rise of 0.2% and Capacity Utilization was also lower – so while the trade this week might be more positive the economy still has its issues – although Hurricane Sandy definetely distorted this data.

In Europe the problems around the conflict in the Middle East and the start of the fiscal cliff negotiations left bourses in the red at the end of the day and before the strong bounce in the US. The FTSE was down 1.27%, the DAX dropped 1.32% and the CAC was 1.21% lower. Madrid was off 1.46% and every other European market that I follow also closed lower. So no doubt they should have a better start to the day this afternoon as they catch up to the US rally.

In Asia the Nikkei was sharply higher again as they idea that a change of Government, now that the election is being held, and the money printing that might accompany it takes hold. This saw the Yen weaker again on the week and the Nikkei up 2.20% in Friday trade. In other markets the ASX was down 0.24%, the Kospi fell 0.53%, SHanghai dropped 0.77% and the Straits Times was flat.

FX Markets

The USD continued to benefit from safe haven flows and strangely given recent correlations the Equity rally did no knock the USD lower this time. Indeed USDJPY pushed higher again and the Yen is at its weakest level since April this year as you can see in the chart below.

I continue to target higher levels in USDJPY in the weeks and months ahead – short term the target levels are 81.88 and then 82.64 with support at 80.65.

The rally in the USD against the Euro also resumed with the EUR turning lower again only a push back above the 200 day moving average at 1.2809 would turn the focus back higher for the Euro. Elsewhere the Pound was a little stronger and it looks like it might have made a tradeable low on Thursday.

The AUDUSD bounced nicely from its  lows at 1.0288 not really getting anywhere near the 1.0250 level that I thought might have been the case. If the argument for a bounce in equities holds any water at all then the Aussie Dollar should also continue to be supported. An old colleague of mine who i was talking to on twitter last week noted that you could see in the way the AUD was trading just how much support the Aussie continues to have. On the 4 hour charts the Aussie looks like it has the legs to rally perhaps back toward 1.0380ish for a retest of the bottom of the pennant formation that it fell through last week.

Commodities

Crude rallied continuing its rather volatile daily moves but it is really just dancing on the spot at the moment and has been for most of the last week but with a mild upside bias. Closing at $86.62 for a gain of 1.22% on Friday Nymex Crude is just a dollar from breaking out of the recent down trend, at least the trendline anyway.

On precious metals markets gold was largely unchanged at $1712 but silver bounced 1.21% to $32.86 oz.

Datawise In NZ we get PPI data this morning and then the minutes from the BOJ’s last meeting which might be of interest to the USDJPY bulls like myself. Also of interest will be the release of the Japanese Leading and Coincident indexes and then tonight in Europe Jens Weidmann of the Bundesbank speaks and we get Italian Industrial orders and sales before US housing sales data for Existing homes tomorrow morning.

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.

Catch me on Twitter @gregorymckenna or @FX_Global