Septaper fears drive US dollar up with Aussie pressure below 90 cents

August 22, 2013

Recap

  • The FOMC delivered a beautiful set of minutes which were very clear. The Taper is coming but because growth is not spectacular rates are going to be very low for a very long time still.
  • Key to the market reactions below though is the following, “…almost all participants confirmed that they were broadly comfortable with the characterization of the contingent outlook for asset purchases that was presented in the June postmeeting press conference and in the July monetary policy testimony.”
  • But stocks didn’t like it one bit with falls from the instant the Minutes hit cyberspace and no recovery in site. At the close the Dow was down 105 points or 0.70%, the Nasdaq fell 0.38% and the S&P 500 dropped 9 points to 1643 for a fall of 0.57%. In Europe stocks went into the minutes announcement with the expectation of a US sell off with the FTSE down 0.97%, DAX down 0.18%, the CAC fell 0.35% while stocks in Milan and Madrid slipped 0.72% and 0.48% respectively.
  • Bonds didn’t like it either with US 10’s leaping to a close of 2.90% which will be worrying the Fed but what can they do about it if they are going to taper. Bunds and Gilts were also both 3 points higher closing at 1.85% and 2.71%. None of these rates are terrible per se but the trend and capital losses are huge.
  • Global FX markets weren’t immune either and when the minutes were released Euro (1.3355), Yen (USDJPY, 97.66) and GBP (1.5661) all came under selling pressure as the US dollar was favoured. While these pairs have largely recovered the Aussie (0.8977) and emerging market currencies such as the Brazilian Real remain under pressure.
  •  On Commodity markets Dr Copper is a bit concerned fall 3 cents to a still pretty good $3.33 lb for a loss of 0.84% on the day. Gold did well all things considered for the US dollar but as a genuinely liquid store of wealth in a tumultuous world its relative strength is understandable – it sits at $1355 oz. this morning. Our friends the Ags were up to their old tricks as well with Corn up 2.84%, Soybeans 1.81% higher while wheat lagged up just 0.75%.
  • In overnight data and supporting taper fears existing home sales in the US were up 6.5% month on month against expectations of a rise of just 1.5%

It is a decent data day over the next 24 hours with the release of Australian leading index,HSBC Manufacturing PMI before a raft of European versions of same as well as the US version and jobless claims and Kansas Fed index. Don’t forget also the annual Central Banker Confab at Jackson Hole kicks off as well.

The Fed is on message and the taper is coming

The Fed has taken Central bank communication to new heights recently as it has walked the tightrope of breaking the nexus between what a taper is and what is an increase in interest rates and what and when the one and the other might occur. As you can see in the Tweet at right after I read the Minutes I have the following view.

  1. The Taper is coming and while data dependant it is now weak data that is needed to derail not strong data to confirm. “…if economic conditions continued to develop broadly as anticipated, the Committee would reduce the pace of purchases in measured steps and conclude the purchase program around the middle of 2014.”
  2. Rates will continue to be held at or near zero for an extended period. “the Committee reaffirmed its intention to keep the target federal funds rate at 0 to 1/4 percent and retained its forward guidance that it anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
  3. The Fed is optimistic on growth but cautiously so. “A number of participants indicated, however, that they were somewhat less confident about a near-term pickup in economic growth than they had been in June; factors cited in this regard included recent increases in mortgage rates, higher oil prices, slow growth in key U.S. export markets, and the possibility that fiscal restraint might not lessen.”

So my sense as I have stated often is that Septaper is likely and if not Sep then Dectaper is a given. Chairman Bernanke wants to start to pull back asset purchases on his watch (he leaves early next year) making it easier on his successor who I hope is Janet Yellen as probably the most qualified at the Fed and probably around the world at the moment.

Stocks remain under pressure

The result of this is that the losing streak the S&P and other US markets are on continued. I saw something on Twitter this morning that said statistically the chances of a bounce are high tomorrow but realistically as you can see in the chart below and as I have noted recently here and in our weekly the stock market retracement from recent highs is likely to head toward the very obvious trendline support which in MT4 S&P terms comes in at 1615 this morning.

If this level breaks then we can expect a move into the 1555/65 region.

FX markets in a state of flux 

The direction is starting to become apparent in FX at present as we are seeing a clear divergence in outcome for the big developed currencies like the GBP, EUR and JPY and the Emerging market currencies and the Aussie which is both providing liquidity for EM FX but also falling under the weight of its own specific problems.

I got a little bit of my Mojo back in the past day after having my backside handed to me over the past couple of weeks. My B account, which is super aggressive, is now up more than 200% since inception and the A account which has been getting smashed from trying to trade properly, if I could put it that way, with stops and the like recovery around 2.5% of the 11% I have lost in the past 2 weeks.

Now not for a minute am I advocating that traders not use stops or trade as aggressively as I have but as I noted in the Weekly Newsletter last Saturday the reality is in times of trouble and states of flux traders should use smaller positions or smaller risk. Even then though, as I have found in the A account recently you can just end up with much bigger runs against you.

It is interesting and why the ATR for position sizing and stop placement as advocated by the Turtles is such a favourite of mine. Keeps you in and gets you out appropriately.

Anyway as noted above the Aussie Dollar is under pressure and as you can see in the chart below it looks like this double top formation is going to turn into one of those rare but beautiful M formations with a full retracement back under 89 – and sometime soon.

Good Luck, Good hunting and watch all those PMI results they are very important in the context of where we are at the moment.

All the best

Greg

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