Vantage FX | Aussie holds 1.0220 as stocks bounce back and Draghi signals negative rates | 3 May 2013

May 3, 2013

This market like Rocky Balboa just keeps bouncing back from any type of slight or looming defeat so the the fall in jobless claims in US overnight to 324,000, a 5 year low, was enough to embolden the Equity market bulls once more and drive the S&P 500back to its recent closing high at 1598 for a rise of 15 points or 0.97%. The NASDAQ was 1.27% higher and the Dow rallied 0.89%.

Certainly the jobless claims is a hopeful sign for the US economy but tonight’s non-farm payrolls is going to be the key driver for the end of week close. The market is looking for 145,000 so look out for that tonight.

But the interesting thing about the data flow is that the PMI’s and indicators of manufacturing that have flowed this week speak of enduring economic weakness across the globe. Why else would central banks be cutting rates as the ECB did last night to 0.50% unless the outlook remains poor economically and why else would ECB boss Mario Draghi even float the idea of negative rates unless there is a real chance that the ECB thinks that things could get dire enough to require them.

But the FTSE, DAX and CAC managed to stay in the black rising 0.15%, 0.61% and 0.06% even though the PMI’s for the two big continental economies still signal contraction. Milan and Madrid stocks however fell slightly falling 0.12% and 0.15% respectively.

Indeed the moves in Euro last night show just how perplexing markets can be sometimes. The ECB rate cut from 0.75% to 0.50% sent Euro up through the top of its recent trading box to a high of 1.3215 but Draghi’s comment that the ECB is ready for negative rates drove it back to 1.3060 this morning. Does that make sense? Hard to fathom how virtually no interest on your Euro deposits drives Euro higher but only slightly less even if negative rates drive it lower. Rationally the difference of half a percent is hardly material but that is the world we are in bad news is good news but too much bad news is bads news. I’m back in Topsy Turvy land again.

The price action is writ large in the big down candle in yesterday’s 24 hours of trade. You can add a little uptrend line on the chart above which would suggest a break of 1.3030 today will push Euro lower. Realistically though we’d probably have the day off and wait to see the release of non-farm payrolls tonight and then go with that move either way.

Likewise in the AUD we remain short at the moment but not that once again the 1.0220 region was solid with the Aussie’s low at 1.0219 exactly the same level as last week reinforcing this 1.0200/20 zone as support for now.

1.0220 remains the key level and a weekly close below here will open the way for a deeper move maybe as low as 0.97 based on the technicals. We note however that AUDCAD recovered off the lows of yesterday as well so it is clear that the better equity price action is good for the Aussie and helping it hold in. Accordingly the non-farm payrolls is also going to be very important for the Aussie’s weekly close – as it always is.

Short term 1.0280 is resistance and 1.0220 is support.

USDJPY rallied back a little also over the past 24 hours and this 97 region is certainly building as a strong support level for the US dollar. We have seen USDJPY trade briefly below here over the past few days and we saw a survey of Japanese institutions yesterday which suggested a majority of institutions still think USDJPY is headed above 100 – perhaps they are on the bid. We will respect 97 as support for now but if it breaks on a closing basis a deeper move is in the offing.

It is important to note that the next day’s price action is a dangerous time to be trading if you are a discretionary trader with a non-sytematic process because non-farm payrolls is widely viewed as the single most important data release for markets each month and the lead up to and aftermath can be volatile. So it is worth noting that we have no idea where non-farm payrolls are going to print tonight – the markets guess of 145,000 is as good a forecast as any. But based on the recent data flow the risks seem to be toward the downside and an undershoot, at least from a private sector point of view and with the current US Government’s own austerity numbers biting it is difficult to envisage government hiring picking up. But we don’t punt labour force numbers – we stopped that back in the early 1990’s because these things are just too volatile so we’ll see how the data flows and then react according to the markets price action in each of the currencies, indices and commodities we trade.

Turning to the Commodity markets  and we saw a remarkable turn around in energy markets from recent weakness with Nymex crude up 3.34% to $94.07. Gold rallied $1.48% or $21.40 to $1467 with Silver up 2.08%. In the Ags corn rose 2.38%, wheat rose 1.16% and soybeans 0.59%.

Data 

It’s a holiday in China and Japan so trade might be light  in Asia but we see AIG Performance of Service index in Australia along with the PPI. In the UK Markit releases their Services PMI and the EC releases its economic forecast for the Eurozone.

In the US its non-farms and ISM non-manufacturing.

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