Vantage FX | Aussie higher as stocks and risk rally extends | 20th November 2012

Stocks extended their rally overnight pushing sharply higher once again as the seasonal bullishness seemed to take hold dragging the Aussie Dollar higher and pushing the US dollar lower once more as the usual correlation asserted itself.

The major catalyst, beside the technicals, seems to have been growing optimism over the talks on the Fiscal Cliff but equally the Housing data in the US was good last night as well. The NAHB housing market index rose from 41 to 46 in November while existing home sales increased from 4.69 million pace to 4.79 million while existing home sales increased by 2.1% in October. This continues the run of better than forecast data in the US which is an important psychological input to traders as we discussed yesterday in our piece on the potential stock market rally.

Elsewhere though the battle in Israel and Gaza intensified pushing crude oil prices sharply higher on fears of escalation and interruption to supplies from the region. Is this a credible concern or just an ex-poste rationalisation for the move? Probably the latter but nevertheless it is a terrible situation and keeping traders focused on the region and just adds to concerns over Syria and Iran.

Stocks

Data in Europe, Italy specifically, was pretty poor overnight with industrial sales and orders accelerating their yearly declines down 4% and 4.2% respectively in September. But that didn’t stop European stock markets from both playing catch up from Friday’s close and then adding some good old rallies of their own. At the close the FTSE was up 2.36%, the DAX (which bounced nicely off support Friday last) was up 2.49%and the CAC rose 2.93%. Madrid was up 2.28% and Milan 3%.

In the US as I write with 25 minutes to go it has been a huge night for Apple which has moved sharply higher up $34.59 or 6.56%. Equally it has been a good day’s trade for the bulls on the markets more broadly with the S&P 500 up 1.75%, Dow up 1.40% and the NASDAQ up 1.98%. The corollary of this of course is that US Treasuries have moved up sharply in yield.

In Asia yesterday the rally on Friday night was the key driver although traders were more tentative knowing that Asian Monday trade can be a grave yard of good ideas hatched out Friday nights US close. So there is room for catch up in trade today. The Nikkei was on a tear again up another 1.43% but it was more subdued elsewhere with the Kospi up 0.93%, the Hang Seng rose 0.49% and the Straits Times rose 0.18%. In Australia the All Ords was up just 0.52% and traders will no doubt be expecting a good kick on today

FX Markets

The USD came under pressure last night as stocks extended their bounce from the lows of Friday’s trade and investors clearly felt that they don’t need a safe haven after all with the talks on the Fiscal Cliff seen as gaining traction and talks on Greece also sounding conciliatory.

The USD has pulled up right at the 200 day moving average support last night and the question of whether the USD can hold this important technicals support will be decided over the next day but it is worth noting that while it looks biased lower the S&P looks biased to break its 200 day moving average to the topside which is entirely consistent given the negative correlations of these two indicators.

The USD’s struggle was reflected in a weaker USDJPY which topped out at 81.58 before it slipped back toward 81.00 and it sits presently at 81.18. Support remains 80.65 on the day and if that gives way then 80.30 and 80.18. Yesterday’s Japanese leading index fell from 93.2 to 91.6 previously reinforcing to me the longer term trend that is beginning to assert itself in the USDJPY.

The EUR rallied hard and is up 0.53% at 1.2803 but off the high of 1.2819 overnight. This is a very strong move off the 1.2728 low and I confess that even though I was bullish stocks yesterday I thought the USD might break the negative correlation and go with it. Seems I was wrong – at least today but I’m not convinced that the strong negative correlation between the USD and stocks shouldn’t reduce in strength in coming weeks and put the EUR back under pressure. Time will tell.

Aussie DOllar and S&P 500

The AUDUSD is getting dragged higher by the better tone in equity markets as you can see in the chart above which is the daily candle of the AUD (Vantage Colours) versus the S&P 500 (Aussie green and gold) which is interesting because it had been doing its own thing for much of the equity market sell off until it hit the acute phase late last week.  The story floating around that the IMF is to include Aussie and Canadian dollars in “official” reserve assets will certainly underpin from a fundamental point of view as well.

Short term the old uptrend line is at 1.0414 this morning and has so far proved resistant to further rallies. If it can push through here then the next resistance is 1.0440/50.

Commodities

As noted above Crude rallied hard and is up 2.69% to $89.25 Bbl for a quite decisive break of the downtrend that has been in force for the past couple of months. This rally could extend as far as $92 Bbl. Gold was also higher which suggests that both its move and crudes and copper and other commodities had benefited due to the fall in the USD’s value. Gold is at $1710 oz, up 1.15% as I write with Silver 1.21% higher.

Datawise In Australia we get the Conference Board leading index and then the RBA Minutes. The BoJ’s monetary policy announcement and press conference will be a huge event for FX traders interested in the take on printing so this is one to watch later today.   Tonight in the US we get more housing data.

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