Vantage FX | Aussie and JPY hit targets amid USD weakness| 4 June 2013

June 4, 2013

What a 24 hours of data we’ve had to kick the week off and what a change from what has been seen recently with the Chinese HSBC PMI on the weaker side as was data in the US from the ISM while in Europe the data for the Markit manufacturing PMI while still in contraction zone was stronger than expected. Worth noting for the longer term and abstracting from one months noisy data PMI reports from South Korea, through Taiwan and on to Indonesia and India were all pointing to a slowdown.

As a result the US dollar came under pressure across the board with even Nymex Crude and Copper higher even as the globe clearly slows because of the US dollar effect. Stocks in the US made a decent comeback with the S&P trading down to a low of 1,623 closing at 1,640 up 9 points or +0.57%. The Dow finished up 138 points or 0.92% and the Nasdaq rose 0.26%.

The key to the rally in US stocks is that even though there were two Fed officials talking about a reduction in the bond buying program last night the view is that the economy is too weak and the Fed wouldn’t dare. Bad news is good news – the world is upside down!

In Europe they seem to have missed the rally in the US late in the day with the FTSE off 0.88%, Dax down 0.75%, CAC off 0.70% while in Italy and Spain stocks fell 0.91% and 0.44% respectively.

In Tokyo yesterday the Nikkei was once again poleaxed and has fallen down and through important support which precursed the fall of USDJPY down and through support at 99.90. There has been a recovery in futures trade overnight as you can see in the chart below but if USDJPY continues to fall then the Nikkei will remain under pressure.

While talking about the Nikkei it is worth mentioning the Yen and its recent strength against the US dollar. While the reality is that these daily notes are in many ways the tabloids of market commentary and as such tomorrows electronic fish wrappers for me the articulation of my thoughts in this note form a core part of my process. So regular readers will recall that i argued that 102.70-103.50 was where the USDJPY would pull up due to a plethora of overhead technical resistance and we then looked for a test and break of 99.90. This has occurred and support is now 98.98 a break of which would open a very deep retracement. But this is the uptrend line from the start of the move so we respect it unless or until it breaks.

The perverse nature of the relationship between economic statistics and data was on show in the US stock market last night as it was with regard the value of the Australian Dollar over the past 24 hours. The Aussie hit a high of 0.9792 more than 2 cents higher than the low yesterday morning of 0.9587. Of course the Aussie rally was expected by us here at Global FX as we targeted a move to 0.9780 last week after the AUD found support at 0.9525 but coming on the day that the ANZ Job Ad’s fell 2.4%, when retails sales grew at just 0.2% last month and when the AiG performance of manufacturing printed better but still appallingly at just 43.80 many fundamentalists might find it strange that the Aussie has rallied so hard when it is clear that the domestic economy is going to be unable to fill the mining void and when the data from around the world is still weak as we saw in the PMI’s over the past 24 hours.

The key here and why we always stress a combination of drivers as key determinants of traders and investors is that the rally is not about Australian fundamentals it is about AUD market positioning (which hit an extreme as you can see in CFTC data released Friday night), its about technicals (market got oversold and suggested a normal bounce of up to 4 cents), and its about the US dollar which was weaker across the board and traded down and through the 99.90 level in USDJPY we highlighted.

Interestingly the daily charts suggests this recovery isn’t over yet. As I wrote in the Free Weekly newsletter on Saturday the rally was expected to head into the 0.9780-0.9870 region. So we’ll see where it goes in the next day or so but it has satisfied our minimum retracement level.

Watch out for the RBA today as I would note that over the past couple of years they often move twice in close order and then step away for a while so this is not a zero probability of a cut day, maybe 20-30% chance. My view, they should cut today. 

Elsewhere the Euro is trying to make my H&S call look silly and in fact it almost does now but the key was and is a break down through 1.2840 and or 1.2740 to confirm the break down. As it stands at the moment thought the Euro is threatening to break up and out of a descending wedge.

On Commodity markets as noted above Nymex Crude was up 1.61%, Gold rallied 1.37%, Silver pushed 2.19% higher and copper rose 1.16%.

Data

RBA the key for Australian and Aussie dollar traders – 2.30 pm Sydney/Melbourne/Brisbane time.

Otherwise fairly quiet.

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