After Q2 GDP surged to 4% it’s time for a huge rally in the US dollar

July 31, 2014

I’m short Euro so you can accuse me of talking my book but it is time for the US dollar to break out and break out big time.

Last night’s GDP surge to 4% annualised in Q2 was just another sign that the US economy is on a very different trajectory to that of Europe. Indeed even though data is starting to show cracks in Abenomics it is clear that in the UK, Japan and the US quantitative easing has had a positive impact on economic growth. An impact the EU has missed.

But if ever there was proof that the world is too complacent and may be different when the fed actually raises rates this was the night.  Stocks sold off initially and the US dollar was stronger while 10 year US treasuries leapt a massive 10 points to 2.56% fora loss of 4.01% in capital price terms.

However once the Fed stayed the course on taper and interest rates – with the exception of lone dissenter Charles Plosser who wants more aggressive action – stocks in the US recovered, the US dollar weakened a little and the bond sell off slowed.

What is remarkable about markets when viewed through this prism is that even though there will be revisions, possibly downward, to this growth rate the Euro is still hanging on to 1.34, that the VIX is still quiet and the S&P is still close to all time highs.

Weekly Euro – Lower prices beckon

Either this is a monstrous bullish sign for stocks and the Euro or there is a huge surprise coming. Traders will be busy this morning trying to figure things out.

So at the close the Dow fell 32 points or 0.19% to 16,880, the Nasdaq in contrast rose 0.46% and the S&P 500 recovered from a low at 1,962 closing flat for the day at 1,970.

It was very different on European markets which were playing catch up to the previous days US moves and the earlier US sell off. The FTSE was down 0.51% to 6,773, the DAX dropped 0.62% and the CAC collapsed 1.23% to 4,312. Stocks in Milan fell 0.93% and Spain continued it remarkable recovery with the IBEX 35 up 0.33%.

In the ASX SPI 200 futures trade overnight the September contract is up 1 point to 5578 which is solid after yesterday’s rally and break and hold above the ASX200 physical market which closed at 5622.

Boom – A big break. Can it hold?

It was a huge break of an important trend in both the MT4 vantage FX SPI and also the physical (although different levels). The big question is can it continue – time will tell.

In Asia yesterday there was another blow for Abenomics with the industrial production data for June falling much more sharply than expected, down 3.3%. It didn’t hurt the Nikkei though, focused on the USDJPY above 102, which closed up 0.18% to 15,646. The Hang Seng rose 0.37% while stocks in Shanghai were a smidge lower losing 0.1% to 2,181.

On currency markets the Aussie was hit the hardest overnight suggesting – to me at least – that RBA Governor Stevens is going to be right about an Aussie dollar fall once the fed starts raising rates. The battler lost 0.6% to 0.9327 this morning after a low of 0.9302 last night.

My feeling on the Aussie is that a close here or lower to end the month is a sign that a bigger multi-month move lower is beginning.  I’m not short though because its just too expensive unless you are day trading while its in this range.

USDJPY was another big mover on the day and is up at 102.82 after that production data reinforced some weakening in Abenomics positive economic impact. Euro fell to 1.3365 at one point but sits at 1.3392 while Sterling continued to drift to a low of 1.6887 before recovering to 1.6915.

On commodity markets iron ore for September delivery dipped 50 cents a tonne to $95.25. Newcastle coal lost 60 cents to $69.75 tonne.

Crude dipped another $1.45 Bbl back below $100 to $99.52. Gold lost a few bucks to $1,295, silver settled at $20.55 oz and copper dipped 2 cents to $3.23 lb. On the Ags wheat bounced 1.39%, corn was virtually unchanged and soybeans dipped 0.49%.

Data-wise today in Australia we get building permits, export prices and private sector credit. Tonight is important for the Euro with the release of German unemployment and EU CPI. A night before non-farms the challenger jobs report will be important.

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