Vantage FX | Aussie reverses hitting 1.04, FOMC disappoints stocks | 31st January 2013

January 31, 2013

The release of the FOMC Statement this morning was much anticipated and it went to script with the Fed reiterating its, commitment to doing what it can to revive the economy through its bond buying program and super low rates – the Fed also highlighted once again that the economy,

likely to warrant exceptionally low levels for the federal funds rate at least through late 2014

They probably won’t be buying $45 billion worth of bonds till then but clearly in this statement we can see that if they need to they will. A fact that was reinforced when they said,

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

We read the statement as fairly strongly dovish and reiterating the line that the Fed has taken for what is a pretty aggressive monetary stance that is currently being run. The fact that they say that the economy paused in the opening stanza of the statement clearly tells us they know their work is not done as does the above quote and the reference to the labour market.

Interestingly though stocks didn’t budge out of their slight losses for the day after the release and US 10’s are actually a little higher at 2.02%. As we near the close stocks falls have actually accelerated. Gold was already up strongly on the night but the Euro is pushing higher as the Fed’s announcement continues to underpin the current sweet spot for global markets. Indeed the fact the Aussie fell out of bed again post announcement reinforces that notion and the notion of the rotation away from safe harbours into markets where the chances of capital gains are higher in the minds of investors.

Also of note from the US last night was the release Q4 GDP which was a bit of a surprise with the preliminary estimate showing a contraction of 0.1% against expectations of a growth of 1.1%. Of course these numbers are annualised so the difference is nowhere near as wide as the numbers suggest. In terms of growth for the quarter what 0.1% and 1.1% actually reflect is roughly 0% growth as an outcome against expectations of growth in Q4 of 0.275%. Defense was one of the key contributors to the fall in GDP. On a brighter note the ADP employment survey was much better than expected up 192k in January against 165k expected.

Stocks

In Europe waiting for the FOMC was the order of the day and stocks took a breather from recent strength with the FTSE down 0.26%, the DAX down 0.48% and the CAC fell 0.52%. Germany held a 30 year auction and like rates in the US its borrowing costs rose from 2.34% last time to 2.45% now which is reflective of the lifting gloom over Europe.

In the US with 18 minutes to go before the close the S&P 500 is down 7 points of 0.45% at 1501 but the intra day high of 1509.25 is the highest level since the first half of December 2007 so the market remains strong. The Dow is down .36% and the Nasdaq is off .53%.

In Australia yesterday the market managed to print higher for the 10th day in a row which is no big deal except that it hasn’t happened for a while. No doubt brokers and advisers are longing for the long forgotten days of the 1982 – 2000 bull market and perhaps we are on the verge of a new dawn for Australian stocks – from an economic point of view if Australians feel wealthier then it might help with the domestic economy and activity but on that note election campaigns normally dampen economic activity for the 4 or 6 weeks that they occur so we wonder if an almost 8 month campaign is too long to matter or so long that it can’t help but matter due to the uncertainty it might create.

The Australian Newspaper this morning reports Roger Corbett, RBA Board Member and Chairman of Fairfax, said

“What this has done is put the country into election mode,” Mr Corbett told The Australian. “Election campaigns are always destabilising for business, especially the retail sector. I really wonder what the benefits are.”

Add this to the floods and Australian growth might come under pressure in the next few quarters – only time will tell.

Global FX

The Euro shot up to a high of 1.3587 in the immediate aftermath of the FOMC decision which seems the right approach as the status quo was reinforced. Euro is now up 0.68% on the day and after another 100+ point range. The Aussie on the other hand struggled in the past 24 hours falling to a low of 1.0400 from yesterday’s high of 1.0475 for a loss of 0.64% at 1.0408 currently. The Yen is 0.50% weaker against the US dollar at 91.18 while the Pound’s recovery continued with it sitting at 1.5794 for a gain of 0.2% on the day. Last week’s USDCAD break out has reversed back below the pivotal 1.0060/65 region and this remains a key level for any further run higher in USDCAD. Watch out for Canadian GDP tonight.

Looking specifically at the Euro we see that it has technically now broken through the neck of the reverse head and shoulders at 1.35 and the way is now pointed higher. The most bullish forecast from this point would be for a run toward the 1.50 region. Euro is now above the 200 day moving average for the first time since October last year and the net target is 1.3820.

Looking shorter term suppport at 1.3475/85 needs to hold or this might be a false break.

Turning to the Aussie it was a story of weakness. Yesterday morning the market looked like it was going to head up toward 1.35 but during the day it simply couldn’t get through the 1.0475 region and we turned short term bears selling at 1.04675 – we took our money a little early at 1.0429 as the last 24 hours candle is as negative as yesterday morning’s was positive. Perhaps that is a warning but the Aussie looks biased back toward the recent base at 1.0380/85 which you can see in the 4 hour chart below.

If, and we stress IF, the 1.0380 region gives way the Aussie will look very weak technically.

Commodities

Gold and Silver continued their rallies up 0.95% and 2.75% respectively to $1676 and $32.01 an Oz. Crude was also higher 0.44% to $98.00 and satisfying our expectation from yesterday. Stuff that grows was on a tear with Wheat, Corn, Soybeans and Sugar all up well north of 1%. Frozen OJ had a huge 4% plus move. We love commodities and commodity trading – the ags and other non “money” markets offer superb diversification.

Data

In Australia we get the HIA home sales, import and export indices, and private sector credit. German retail sales, unemployment and price indices will be a European highlight tonight before Canadian GDP and US jobless claims.

 

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