Vantage FX | Euro rallies but top near? Aussie doing well | 23 July 2013

July 23, 2013

I’ve changed the format this morning and I would love to get readers feedback good OR bad.

Recap

  • The US dollar is on the outer and even though it has recovered from its lows it has been losing ground against the Aussie (0.9250), Euro (1.3185), GBP (1.5357) and even Yen which was the big mover gaining 0.9% to 99.55 this morning. The Kiwi recovered from the early morning dip yesterday after the earthquake and EURGBP is falling nicely as expected.
  • S&P 500 +0.20% 1696 – a new high, again, the FTSE and DAX were largely unchanged but the periphery rose with gains in Milan and Madrid.
  • The SPI 200 is around 4971 overnight a little off the high above 5000 hit yesterday – it looks wobbly up here based on the technicals
  • US 10’s were largely unchanged as were their German counterparts but Italian 10 years fell 8 basis points
  • On the economic front Existing home sales in the US were running at a slower pace than expected (-1.2% v +0.5%) which seemed to help subdue emotions about the taper and undermine the US dollar.
  • Commodities saw gold burst through my $1302 stop in long (I pulled it Saturday morning and forgot to put it back yesterday when I drove to Sydney – DOH!) for the biggest one day up move in some time and the precious metal sits at $1332 up $43 oz. Dr Copper was also higher up 1.25% showing that this is really a US dollar move.

Today in Asia we’ll be watching the Singaporean CPI which will be interesting in the context of where their GDP has gone and then we get retail sales in Canada, Redbook in the US along with house prices and Richmond Fed manufacturing index and EU consumer confidence.

On the day there really aren’t any decent catalysts to move the stock market other than these company announcements in the US and if that is the case then it seems more likely than not that the US dollar remains on the back foot until a catalyst for a reversal becomes apparent. Advance GDP on July 31st is a massive number to watch and jobless claims along the way, later this week will also be important.

For today though its small positions and short term trends for the traders.

Full Moon theory and the Euro

The moon was big and beautiful going down over Sydney as I drove across the Harbour Bridge this morning and it reminded me of an old theory a futures broker I sat next to at JB Were a long time ago used to say about markets going a little haywire around full moon time and then reversing a few days later.

The reason I raise this is that the US dollar seems to be going counter to any rational way it should be at the moment losing ground across the board which is a point I hear often in reports I read and in the press and on the screens.

Could it be Tony’s “Full Moon Theory” (believe it or not I did see it work 11 out of 13 one year in the early 90’s) or have we actually and finally found a level in the Australian Dollar, Yen, Euro and GBP?

It is a difficult question to answer because fundamentally there is so much going for the US isn’t there?

Actually there isn’t and it is entirely appropriate that the USD lose a little ground against the Euro and in doing so I’m guessing everything else – let me explain.

The Chart above is of the Difference between the EU and USA Citibank Economic Surprise Index and the EUR rate. As you can see the correlation is not perfect but it is indicative for the direction of the pair.

You are probably asking why this should work because we need to see not only correlation but causality both of which I would argue are present. the Directional correlation is evident – it’s not perfect and options traders would be aghast at my loose use of the term but it is there for you to see. Likewise the causality – remember that my fundamental belief is that markets and particularly FX markets are all about people and their heuristics and behaviours.

So I believe that at its essence being good at making money in FX and markets generally is about trading like John Maynard Keynes. You may be aghast at that but his insight below is brilliant,

“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” (Keynes, General Theory of Employment Interest and Money, 1936).

Whether you are a fundamentalist, a predictive technical trader or a trend follower this is at the heart of what you are doing.

So the causality runs in that as the data prints better or worse than the market expected in each jurisdiction it impacts on the relative view of the FX rate between Europe and the United States – the Euro. Consequently US data has been relatively weaker than data in Europe which really just means that the recovery isn’t as strong as some (me) thought it would be and Europe is not as bad as many feared (YET) – its the same with earnings season and massaging expectations for company reports in the Stock Markets.

SO – there we have it. The Euro’s rally is entirely rational. But will it last?

The easy answer is no – US expectations will be recalibrated to a lower expected path, expectations in Europe will adjust and so the “expectations gap” will change or close. In the meantime though with Euro having made a marginal new high some may thing it might – my personal view though based on teh chart below is that I’m square Euro or going short on a break of the uptrend line in what might be a huge 4 hour pennant formation.

That horizontal line seems to be a pivot point for Euro going back into 2011 so if we are wrong and it does get above then it could go for a run until expectations recalibrate – but I’m still a long term US doll bull.

Have a great day

Greg

Social

Free Daily Market Update

Live Spreads

SymbolBidAskSpread

Spread

Sign up to the latest forex news and daily FX trading setups

Get started with a FREE $50,000 demo account