Vantage FX | Aussie dollar Breaks higher on stock rally| 26th November 2012

November 26, 2012

Last week was a good week for stocks and for the first time in ages my summary of the week’s events had more positives than negatives from the fundamental side of the equation. The Chinese PMI back above 50 for the first time in 13 months, the German IFO business confidence survey released Friday at 101.4 was better than expected by almost a full point, US housing data was better again, we had a cease fire in Gaza. On the downside the two key points were Japanese trade data which showed a fall in exports of 6.5% yoy in September and France’s loss of its Triple A from Moody’s

But this week will need to see confirmation of the moves higher in stocks because of the interrupted holiday trade and also because in terms of the US Stock rally it came on pretty thin Holiday induced volume. One of the tenets of futures trading that I was taught more than 20 years ago was that volume was the confirmation that supported a market move – we didn’t get that last week so as a result we are a little wary this week.

Of course we are also watching the impact of Fiscal Cliff talks in the US given the market has rallied back so well over the past week and has a lot of embedded capital gains for the year in it.

So having called the rally in stocks last week we aren’t going to jump off the band wagon just yet but there is enough potential hiccups in coming weeks for us to drag stops up closer to market and to take some cash if the S&P 500 hits the 1418/21 region for the moment.

Stocks

So at the half day close on Friday the S&P 500 was up 18 pts of 1.30% to 1409 after playing catch up for the day off and the more ebullient tone from the Chinese data earlier in the week. The Dow rose 1.35% and the NASDAQ up 1.38%.

In Europe every index I watch except for Oslo, which was down just 0.08%, rallied. The German IFO certainly helped and buoyed European markets with the FTSE was up 0.49%, the DAX rose 0.89% and the CAC was 0.87% higher.

In Asia it was a similar story of markets finishing in the black and given reports this morning are that the Black Friday trade in the US was the best ever it is feasible that Asia kicks off with a bout of buying. In Australia the SPI 200 has room to run toward 4464 trendline resistance from Friday’s close at 4443. Likewise all the calls for more cuts in Korea probably bias the Kospi higher but the Nikkei might suffer a little under the weight of Abe’s retreat, subtle as it is, from his previously aggressive BOJ stance.

FX Markets

The Euro’s moves last week technically made sense but fundamentally I struggled to make any sense of them given the enduring problems and lack of resolution over Greece or even an agreement on the €1 trillion budget for the zone going forward. Instead the market preferred to focus on the “hope” of a resolution as opposed to the actually non-resolution which is very informative in itself. But the reality seems to be that the correlation between the S&P 500’s moves and that of the Euro might have played more than a small role in this with the Euros 21 day correlation with the S&P about 0.70 and still close to 60 over 55 days.

Last week I thought the Euro was biased back to the trendline resistance you can see was the high on Friday night and came in at 1.2990. It retains a positive bias on the daily charts but is a little overcooked on the shorter time frame and I wouldn’t be surprise to see it pull back a little toward 1.29. So on balance based on both the correlation with the S&P 500 and the technicals EUR needs a continued stock rally and a clear break of 1.30 to push higher. One confirms the other.

In Japan it seems that the putative PM Shinzo Abe is walking back from the attack on BOJ independence that he has been waging since it became clear there was an election coming a couple of week’s back. What possibly changed his rhetoric has been the tensions between his plan to raise inflation and the mountain of Japanese Government debt that needs to be serviced. It was widely reported in the last few days that if inflation rises to his 2% target then the cost of servicing the debt will exceed ALL of the expected tax revenue. This reinforces the USDJPY high for the moment for me even though it did come back very strongly to finish at 82.36 from the low of 82.05

For the AUD it broke decisively through the 1.04 at the same time that the US equity traders came back and took the S&P 500 higher. For the Aussie bears out there the strength of stocks is a headwind and although the daily 21 and 55 day correlations are quite weak at 0.14 and 0.15 respectively it does set the overall tone for risk assets as you can see in the hourly chart above of the AUDUSD v S&P futures trade.  Obviously a pullback in stocks will probably knock AUD a bit also but my sense is that there are a lot of short term bears out there being pressured and they may break if AUD trades up through 1.0485.

Commodities

Crude was up 1.03% to $88.26 Bbl rising from the outset as the US dollar was hammered by the strength in equities pushing US dollar denominated commodities higher.

To wit, Gold was up 1.35% to $1735 oz while Silver rose 2.30% to $33.385 oz. As you can see in the chart above from my Vantage platform Silver is approaching long term resistance which stretches back to the September 2011. A break of this line at $34.20 would open the way for a run to the recent high at $35.35 – one thing to note though is that we always respect trendlines and never pre-empt the break.

Datawise We are watching the results from the Catalan election today as well as the Minutes of the BOJ’s recent meeting and of course the Euro EcoFin meeting tonight and what they say and do about Greece. Toniight the Chicago Fed and Dallas Fed indices are out.

Over the rest of the week we’ll be watching the trade data, Business Confidence and private Capital Expenditure in New Zealand, Retail Sales and Industrial Production in Japan, GDP, Mortgage Approvals and Financial Stability in UK, Durable Goods, S&P Case Shiller House Index, Richmond Fed, Beige Book, New Home sales, GDP, Jobless Claims, Kansas Fed, Personal Spending and Chicago PMI in the US.

In Australia the key data in our over leveraged economy is the Private Sector Credit data late in the week but we also have HIA new home sales and construction work done.

Thoughts, comments, queries together with frank and fearless feedback all welcome. I’m happy to answer questions or comments on the comment stream wherever I can

NB: Please note all references to rates above are approximate and should not be used for trade reference.

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