US Dollar makes some headway as the divergent economic outlook becomes obvious

May 23, 2014

For ages now I have been warning of lower levels on the Euro. The ECB wants the economy needs it and the data divergence in the economic outlook between the EU zone and the US demands it.

But until recently none of that mattered as the Euro headed up toward 1.40.

At 1.3655 it is only off a couple of percent from the highs but the data in the US overnight suggesting the the economy might be getting back on track and that the dip in the housing market might have ended might just be the start of something bigger for the US dollar.

The data showed that existing home sales rose for only the second time in nine months with an increase of 1.3% in April. Even though this was lower than expected it was still a positive result when coupled with the Flash US Markit PMI which printed 56.2 versus 55.5 expected and the Kansas Fed manufacturing index rose to 14 from 12 last. The Chicago Fed national activity index was however a little weaker than last time.

The impact on the Euro overnight was not a huge one in a percentage sense but it did cause a reversal of fortune and as the chart below shows Euro is very close – but not yet achieved – a downside break.

The pink line is the old 10 month uptrend that has recently broken and the blue line the 200 day moving average. There is a a chance – a real one – that like every other sell off recently Euro rallies off the support the 200 day moving average represents so 1.3630 is a level to watch but not pre-empt. On the topside if Euro rallies selling above 1.37 while below 1.3730 might be a decent trade.

Turning back to overnight markets the the Dow was roughly unchanged at 16.543 but that masks an early dip, rally then sell off toward the close. The Nasdaq rose 0.54% to 4,154 and the S&P 500 rose 4 points or 0.21% to close at 1,892. The S&P is now back at the top end of the recent trading band in futures terms with 1,901 the big level to watch.

In Europe it seems the FTSE was non-plussed with GDP printing at 3.1% as expected of the pick up in business investment in Q1 2014 to 2.7% suggesting much of the good news is priced in (GBP fall overnight supports this). In the end the FTSE was unchanged at 6,821. In Germany the DAX rose 0.24% to 9,721 while the CAC in Paris rose 0.2% to 4,478. In Milan and Madrid stocks fell 1.09% and 0.1% respectively.

Locally after a solid day yesterday the ASX Futures market the June SPI 200 contract is up up 14 points above the 5500 level at 5501. The SPI 200 is now testing the underside of the previous uptrend it broke down through earlier this week.

Turning to currency markets and as we noted above the US dollar was pretty solid against the Majors and the Aussie could not hold onto the Chinese data induced gains and sits back at 0.9227 this morning. USDJPY is up at 101.73 while GBP is back at 1.6869 off the day’s high of 1.6916.

Looking at commodities gold is up $6.90 in spite of the US dollars solid night at $1,294, Nymex June crude is off a little at $103.78 and silver rose a little less than 1% to $19.55 oz. Copper sits at $3.15 while the Ags were mixed with corn up 0.53%, wheat down 0.75% while soybeans rose 0.78%.

On the data front the release of the Chinese leading economic indicator and Singaporean CPI are the only areas of interest today before German GDP for Q1 and the release of the IFO business climate data will be important as will US home salees later in the night. Otherwise it will be fairly quiet.

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