Vantage FX | Bernanke and uncertainty underpin the US dollar and gold| 27th February 2013

February 27, 2013

The uncertainty caused by the Italian elections continued to reverberate around markets overnight with European stocks under pressure and the US dollar and gold benefitting materially from the malaise.

The election result seems to have come as somewhat of a surprise to the established players and clearly also the markets. Stocks in Milan fell 4.9% dragging the rest of Europe with it and putting the whole Euro project in jeopardy. There is some hope that the previous antipathy between the established players may be put aside for some sort of “grand coalition” but the comedian turned politician Beppe Grillo who has driven a wedge through the establishment says he won’t be part of it.

We can all wring our hands and worry about what is going to happen but I thought a quote I saw on Reuters this morning summed up the outlook in the months ahead without too much hyperbole,

At the very least, a prolonged period of uncertainty faces the Italian economy, affecting investor sentiment. In coming months, fiscal slippage and obstacles to structural and labor market reforms would not at all be well received by global investors,” said Andrew Milligan, head of global strategy at Standard Life Investments

Uncertainty is never good for markets. Well that’s not exactly true is it. It is bad for some markets and good for others. Take last night’s price action as an example. The US dollar gained ground against all comers and gold rallied very sharply. Of course this is the normal thing in times like these when uncertainty rises materially but it serves as a lesson to traders that there is always a market somewhere that offers opportunities.

Indeed the USDJPY moves yesterday were both volatile but also predictable.

You can see in the hourly chart above the swift move once the 91.90 level gave way yesterday morning. USDJPY traded down below 91 before bouncing sharply. A sell stop on a break of 91.90 would have rewarded handsomely for the nimble trader and even though the recovery has been fairly good the outlook for USDJPY has turned for the moment.

Of course when you look at the USD’s strength against other currencies, gold’s rally and the Yen’s move we see the classic style of safe haven play in uncertainty. What we haven’t seem – as you will note – is a rally in the Aussie dollar. Sure some will say that RBA Assistant Governor Guy Debelle’s comments in a speech yesterday that the Aussie dollar was

“somewhat on the high side”  and “There’s no limit on our ability to supply Australian dollars,…We have more Australian dollars than anyone else in the world because we print them,”

thus implying that the RBA could intervene if they wanted is the reason the Aussie is lower and that may be so. But at the risk of banging on a drum the Aussie did not rally in increased uncertainty.

It is not a safe haven – a safe harbour at best and as you can see in the chart below traded under 1.02 last night.

The Aussie seems biased toward 1.01 at the moment.

Turning to other news overnight Fed Chairman Bernanke gave solid support to the easing policy and bond buying strategy that the FOMC is conducting. Last week there were thoughts, which we shared, that perhaps the Fed recognises the risks it is running in the unconventional policy and the impact it is having on markets particularly stocks. However overnight in his Testimony Bernanke said,

To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation,

No mucking around there he is clear – jobs are still the focus and the Fed goosing stocks is seen as less troublesome than having less people in the work force. Of course at a humanist level we could not agree more, we want to see as many people in jobs around the world as can be found but while Bernanke’s comments show the Fed will stay the course there is no denying that its program is a potential cause of instability down the road – its just he sees the risk as small compared to getting people back to work.

These comments together with a solid year on year rise of 6.8% for the Case Shiller House price index and the big bounce in the Richmond Fed index from -12 to +6 helped stocks in the US shake off the European weakness. At 7.22 with 38 minutes to go the Dow is up 103 points or 0.75%, the Nasdaq is up 0.28% and the S&P has rallied back to 1495 for a rise of 0.48%

Earlier in the night as noted above Europe was under the pump. Adding to Italy’s near 5% loss, Spainish shares fell 3.20%, the CAC dropped 2.67% the DAX fell 2.27% and the FTSE was 1.34%.

To recap FX markets after all the ructions and big moves this time yesterday the Majors are largely unchanged day on day. In commodity markets Crude is down 0.63% but copper, wheat, corn, silver and gold were all higher. Looking directly at gold we said last week that it could rally as much as $50 from the pessimistic crescendo that we saw and it is now up more than $60 from the low sitting at $1609 up 1.83% on the day. On the charts however  Gold’s rally does not look over so further strength is probably in the offing.

Data

Kiwi Trade data, Japanese retail trade and Australian construction work are on the agenda this morning before business confidence data in Europe and durable goods in the US tonight.

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