Vantage FX | Euro down, Aussie reverses from new high | 7th December 2012

December 7, 2012

A very interesting night last night when you look at European markets – the Euro was hit hard falling from a high of 1.3087 to a low of 1.2948 but the DAX hit a 5 year high.

The key driver of these divergent moves was the ECB’s decision to leave rates at 0.75% last night but at the press conference that followed the announcement ECB President cited persistent uncertainty as weighing on the growth outlook which the ECB slashed for both 2012 and 2013 together with the outlook for inflation. Draghi said the ECB expects European growth to contract 0.3% in 2013 which ignited expectations that rates in the Eurozone will need to fall again. Whether or not rates fall is largely immaterial when the absolute level of ECB rates is 0.75% but the markets are clearly worried that if the ECB is forecasting 0.3% that there is going to be a high chance of an undershoot.

Equally given other moves in FX and commodity markets a large part of the Euro’s pullback can probably be slated home to the US dollar which had a better night across the board

Equity markets in Europe were however more positive and the DAX surged more than 1% higher after the release of a turbo charged German factory orders which were up 3.9% against 0.9% expected and a fall of 2.4% in September.

As you can see in the weekly chart of the DAX above it has been trading very technically over the past few months breaking trendlines then retesting them and then breaking out again. Subjectively and fundamentally with all the weakness in the European growth profile both recently and in prospect it is hard to see why the DAX is so high but this simply proves two important points at the moment:

  1. Super low interest rates are aimed at and do distort expected future values of cash flows and thus drive asset prices higher than they otherwise would be for any given level of growth and
  2. Simply trading on economic fundamentals doesn’t always give you the right leads over shorter time periods so technicals and or trend following aspects should be part of your process.

Elsewhere on the data front the jobless claims data in the US is back to the levels we saw before the Hurricane Sandy interruptions printing at 370,000 from 393,000 last week and 380,000 expected.

Stocks

As noted above the DAX was up 1.07% and the rest of Europes bourses were mostly higher. The FTSE rose 0.16% while the CAC was 0.31% higher. Madrid was up almost half a percent and Oslo rose more than 1%.

In the US with 27 minutes to go the S&P 500 is up 0.09% at 1410 as it continues to jog on the spot. The Dow Jones is up 0.1% and the NASDAQ is up 0.24%. Apple has staged a big rally off a low overnight as it approached its recent low.

In Asia yesterday it was a mixed day and we saw Shanghai and the Hang Seng give back a little bit of the stellar gains from the previous day. Shanghai was 0.13% lower with the Hong Kong market off 0.09%. The Nikkei rose 0.81% however supported by opinion polls that show there is likely to be a change of Government and Liberal Democrat leader Abe will get his hands on the monetary levers. The ASX fell 0.27%.

FX Markets

As much as I have spoken about the Euro above it really looks like it is as much or more about the US dollar last night with a decent fightback after acute weakness which at one point drove the AUD up to 1.0513, GBP up to 1.6137 and even USDJPY down to 82.18.

It has become unusual for the USD to rise at the same time that stocks are rising but it seems to me that with the US recovery looking stronger than that in Europe where the ECB confirmed overnight there is a lack of recovery it seems the USD can probably find some impetus for strength as long as the US doesn’t head over the cliff.

Looking at the technicals for the Euro the sell off from the high is starkly obvious but so is the support that sits at or around last night’s lows. A break of 1.2940 which is the convergence of the two trend lines would signal a deeper pullback but as we always write don’t preempt trendlines unless or until they break.

I noted yesterday after the Autumn Fiscal Statement that the UK’s Triple A rating might be on shaky ground and overnight Fitch confirmed this saying that the slippage in the budget trajectory did indeed put the rating at risk. A downgrade of the UK would be a very big shift and thoughts, let alone moves, like this simply reinforce the relative atttractiveness of the Australian dollar in the globes least ugly currency contest.

Speaking of the Aussie it remains a frustrating beast breaking through the top of the recent range to a high of 1.0515 before pulling back to sit at 1.0476 as I write.

The outlook remains clouded on the dailies although with a positive bias but a break of the 1.0535 region, particularly if it is on a weekly close say tonight for example would be very positive.

Commodities

Reflecting the recovery in the USD crude oil was 1.79% lower to $86.31 Bbl buut gold and Silver managed to rally 0.35% and 0.42% respectively. Copper fell by more than 1% and sugar was lower by almost 1.5%. The Ags were mixed with corn down 0.63%, wheat up 0.36% and soybeans up 0.66%

Datawise In Australia the trade balance is out and then tonight we get German and UK industrial production data prior to the big number of each months US non-farm payrolls.

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.

Catch me on Twitter @gregorymckenna or @FX_Global

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