Vantage FX | Euro finally breaks 1.30, RBA to cut today | 4th December 2012

December 4, 2012

The Euro was the big winner overnight surging up through 1.30 on the news that Greece was planning to buy back up to €30 Billion of its €62 billion of its debt that is in private hands at some like 32 cents in the dollar. PMI data improved as well across the globe in most nations except conspicuously Australia and the US.

The release of the US data sapped some of the strength from the European rally and put a dampener on US stock market performance and the US dollar.

The Greek announcement that it wanted to try to buy back some of its debt at a fraction of the face value of the bonds is an interesting move and quite a sharp one. Greek debt has been trading in the region of 25 cents in the dollar since the restructure so the offer is a premium but if successful Greece will be able to cancel as much as €20 billion in debt – good deal if they can get away with it we’ll know how this reverse tender goes by 5pm London time on the 7th.

Elsewhere the release of a raft of PMI data was interesting in terms of market sentiment and the reaction to the data flow given there was something for the bulls and the bears in the releases.

As you can see in the table above for the most part the PMI data improved across the globe in the past month but as you can also see a large swathe of the countries are still below 50 and in the contraction zone. Most notably China, India, Brazil and Mexico are above 50. The US is conflicted with the Markit PMI at 52.8 but the ISM PMI at 49.5 and down sharply on last month. Indeed the ISM manufacturing PMI is at its lowest level since mid 2009.

Of note of course for those of us interested in what the RBA might do today is the AIG Performance of manufacturing index  which fell sharply to 43.6 from 45.2 previously. This together with data such as retail sales, which were flat in October and only saved from negative by a big uptick in food retail, the negative print on the TD monthly inflation gauge and the fall in ANZ Job ads points to an RBA that is more likely than not to cut rates today from 3.25% to 3%.

3% is a very low number in the context of the level of interest rates in the modern era given the only other time we have seen a rate like this is during the depths of the GFC but because Australian rates are still so much higher than the rest of the globe it is unlikely that this fact in and of itself will knock the AUD too far. But I remain of the view that the economy is weak and that more rate cuts will be necessary – I have thought for some time rates will head to 2.5% and the data flow confirms that for me. The contraction in this interest rate spread will at some point materially impact the AUD but I think it would have to be RBA rates BELOW 2.5%.

Stocks

As noted above European stocks were buoyed by the Asian data with the DAX up 0.40%, the CAC up 0.26% but the FTSE only rose 0.08%. In Madrid stocks fell 0.46%.

In the US with 35 minutes to go the S&P 500 is down 0.46% to 1409, thee Dow is down 0.41% and the NASDAQ has fallen 0.29%.

Asian stocks continue to be a bit of a conundrum if you are a fundamentalist. The Shanghai was down 1.03% even though it seems like the chances of a hard landing in China are receding. The Hang Seng was also lower by 1.19%. In Australia the All Ords rose 0.49%, the Kospi was up 0.37% and the Nikkei rose just 0.13%.

FX Markets

Euro finally managed to move above 1.30 and it did it with style in the past 24 hours with a 1 cent rally from the low yesterday of 1.2976 to a high of 1.3076 and it sits now at 1.3060 up 0.59% on the day.

As you can see in the chart above from Vantage the Euro has been rallying for 3 weeks now. It has now broken the trendline that goes back to March 2011 but still has some overhead resistance from earlier this year and then of course the recent range top around 1.3170. Unless or until this level can be broken I am not getting too bullish even though my trend following systems are long – but then again you are never really bullish or bearish in trend following are you but simply long or short.

Elsewhere USDJPY had an inside day – that is it traded inside the range of Friday with a high of 82.50 and a low of 81.97. Short term a break of 81.95 is needed to knock USDJPY a little lower. GBP spiked higher along with the Euro but 1.6175/80 needs to break to kick Sterling significant higher – it currently sits at 1.6095 up 0.53%.

The Australian dollar showed remarkable resiliency yesterday given the raft of weak data. The fact that the RBA is widely tipped to cut is no big deal but the weakness in the data was really telling insofar of the absolute lack of material impact this had on the AUD which made a low of just 1.0390 in the past 24 hours. This was just above my level for a break down noted yesterday but the Aussie looks like it is slowly slipping away as you can see in the chart below.

Perhaps it is the case that FX punters are betting that the RBA won’t be cutting rates today – maybe I’ll have a look at the odds on a binary option for 3pm this afternoon just after the RBA announcement at 2.30pm. Could be interesting. I’m targetting a move to 1.0350 sometime soon.

Commodities

My focus is off Silver this morning and back onto crude which hit and rejected a little trendline I have had on my chart for a week or so. It really is a lesson in putting in potential trendlines as a que to trades and resistance even when they are tentative – you just never know what everyone else is watching.

You can see in the chart above the rejection of this roof line as my son like to call it and Crude is sitting at $89.04 up 0.15% on the day.  The Ags were mixed again with Soybeans up 1.08%, Wheat down 0.44% and Corn rose 0.27%.

Looking at precious metals even though the focus isn’t Silver it is worth noting that it rose 1.27% overnight to sit at $33.62 oz while Gold rose 0.40% to $1717.

Datawise In Australia we get Building Permits, Current Account and RBA decision while tonoght we have a EcoFin meeting in Europe and Redbook and NY ISM in the US.

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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