Are markets transitioning to a weaker US dollar and stronger Aussie?

August 19, 2013

Recap

  • The big story this week flowing from Friday’s trade has to be how high? How high are US 10 year yields going to go before real money buyers enter the fray. On Friday night the 10’s were smashed rising to 2.86% which is the highest in a few years and a good 1.2% above May’s low.
  • Stocks in the US were buffetted by this and while they ended off their lows were still under pressure with the Dow down 0.21%, Nasdaq down 0.09% and the S&P 500 closing at 1656 off 6 points or 0.32%. Europe didn’t care though with gains in the UK (+0.26%), Germany (+0.19%), France (0.75%), Italy (+1.23%) and Spain (+0.95%) all higher as recovery trumps US bearishness.
  • On Global FX markets it was another day of volatility while markets danced on the spot. Believe it or not the US dollar actually closed the week stronger against the Euro (1.3329), Yen (USDJPY 97.53), Aussie (0.9185), CHF (0.9265) and CAD (1.0336) with only the Pound moving higher last week up 150 points to 1.5629.
  • On Commodity markets Gold is up another $10 to $1376 oz., SIlver had a huge week and closed at $23.21, Crude ($107.68) was largely unchanged and Dr Copper rose 0.79% to $3.37 lb. Our friends the Ags continued their volatility with Corn and wheat both down more than 1% while soybeans were 0.39% lower.
  • Data out in the US showed an unexpected drop in Consumer confidence to 80 against 85.5 expected. This was a big miss but confidence is still way up on the past year. Housing starts and building permits also missed a bit and the rise in rates is going to be a worry for this sector as mortgage rates have to rise.

On the data front a curiously barren week with periods of activity. Today we have NZ PPI, Japanese Trade, Australian New Motor vehicle sales and a couple of bill Auctions in the US. But the key data will be RBA and Fed minutes and all of the HSBC and Markit PMI’s and don’t forget jobless claims which are at 4 year lows. Watch out for all of these when trading

Could things be turning on their heads?

In our weekly newsletter on Saturday I noted that perhaps everything had turned on its head this week because it has become apparent over the recent weeks that the US does not have a Monopoly on growth, which I confess has caught me by surprise because not for a second did I think that Europe was on the verge of recovery. Now I am still not convinced that it is in or on a sustainable path to recovery but that is not the point. The point, if you are trying to make money, is how the data prints relative to expectations.

Keynes Beauty Parade.

So I offer this chart below as an example of why, perhaps, the US dollar is under a bit of pressure, why the European stocks markets survived last week’s US stock market swoon so well and why perhaps everything for the last few months of the year has been turned on its head.

It’s all going up and if it’s all going up then it’s not all about the US and the US dollar.

As they say in the Toyota Ad – Bugger, I had it the other way.

Volatile week reflects transition

So if we think about the above and the moves we saw over the past week where the intra day volatility seemed to decline but the intra-hour volatility was at recent highs then we know that we are in a period of transition. Perhaps a false dawn of US dollar weakness, perhaps a false dawn of Euro and Pound strength and perhaps a market where the Aussie still won’t take out 0.9350.

But equally perhaps a time when the trend of USD strength which many expected and speculative positioning is still predicted may be wrong or at least back the front.  Take Aussie positioning still this week after the bounce of the AUDUSD as you can see in the CFTC report from the weekend below.

Have no doubt the big specs positioning short has reduced in the past couple of weeks and it sits at -62,000 and change still – which only 6 or 8 weeks ago would have been an all time record. So you get a sense of the extremes things are at – the Aussie has its own problems but the level of USD bullishness reflected in Aussie Dollar shorts is indicative across the board.

So the big question as you can see in the Euro chart above is whether we are just in a big old box trade as Darvas would say or a period before the break out.

We’ll know soon maybe even this week.

Is the Aussie dollar getting ready to break higher

The Aussie has built a base at the bottom of the big weekly channel we identified a couple of weeks ago and last week tested back towards the break up point of 0.9035. Quite frankly I have been trading very poorly and have been caught the wrong way so I am hoping that the RBA is a bit more dovish in the minutes to be released tomorrow morning so I can get out on the down draft.

0.9350 is still the key level as you can see in the chart above and all my stops on dodgy shorts are up there but I’ll probably be trying to get out as soon as I can this week and then we might just be in for a run to 95 or 96 cents.

Good Hunting

Greg

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