The Aussie dollar is currently sitting at 0.9997 in early Asian trade today and the Euro is at 1.2962 as the US dollar gains ground and most likely looks to continue to gain ground over the months ahead given the continuing difference between economic outcomes in the US and in Europe and given that the Fed has not too gently signalled that it is contemplating the withdrawal of some of the stimulus efforts that it is currently using to pump up the markets.
Over the weekend noted Fed mouth piece Jon Hilsenrath writing in the Wall Street Journal that,
Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations.
Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.
So this is presumably the first step in the event that all of Wall Street has been waiting for… the end of the latest “quantitative easing” program and, thereby, the beginning of the Fed’s exit from the massive bond portfolio that it has built up over the past 5 years.
We know that at the time the previous QE’s 1 and 2 ended the market went into a swoon which reinforces the notion that the Fed’s balance sheet is the real reason stocks are up not anything to do with earnings or the economy. We hold that view strongly and would be concerned for the health of the stock market and its ability to hold its current level once QEinfinity ends.
So as we set up the week in early Asian trade we wonder what stocks traders will do with this news? Will they take it in the spirit that the Fed has tried to set it up as – that is a reminder that at some point they will need to take back the stimulus. Or, will traders take it as the beginning of the end and sell accordingly?
We have no idea to be frank and have to await the price action but the next 24 hours might be interesting for stock traders. This is particularly so given that the Dow and S&P both made new all-time highs on Friday night closing at 15,118 and 1,634 respectively while the Nasdaq was 0.82% higher. The DAX also made a new all time high rising 0.2%, the FTSE was up 0.49%, the CAC rose 0.65%, stocks in Milan rose 1.13%. Stocks in Madrid closed 0.32% lower.
But as you can see there are still plenty of bulls out there with this week’s cover seeing Barrons double down on its bull market cover of a week or two ago with the cover saying that this bull has room to run and certainly if QE continues it has.
Equally the slow melt higher just keeps keeping on and the bullish stock market has also been hurting all those bears out there. Is the complacency now such that this Hilsenrath article can derail stocks sustainably? We doubt that. Will the article slow the rally? Possibly that is likely the Fed’s aim. Could it have no impact at all – possibly but unlikely.
One thing the article will do however is reassert the preeminence of the US dollar at the moment and likely drive the Euro and Aussie dollar and of course our friend the Yen all lower. What the Fed is signalling ultimately is a monetary policy shift at some point while markets widely expect the ECB, RBA and BoJ are going to have to keep cutting so we get an important swing there in support of the USD. Equally the current economic surprise index is strongly in favour of the USD relative to the economic outcomes in Europe, Japan and even Australia with the huge surprise in the employment numbers last week.
So on Friday night the Euro broke lower through the bottom of the recent trading range hitting a low of 1.2934. We went short in the 80’s and left a take profit on the night so we are square Euro looking to get short again sometime today. The little uptrend from the March low has now been broken and our bias is for a move down toward 1.2840 region and then 1.2750.
The Aussie has also broken down but far more decisively than the Euro with a big break of a year long weekly range. We continue to favour a move toward the 200 week moving average at 0.9857, which is also the trendline in the chart above, as a first target and then we’ll see after that. Some people are thinking the Aussie is oversold and perhaps on the dailies and hourlies it could be but the Weeklies have only just begun. As readers know we were about the first to get bearish the Aussie and now that the hedgies have all been talking about it a reaction in the opposite direction could result but the positives are being kicked out from under the Aussie and we are seeing sellers emerge on rallies not buyers on dips for the first time in quite a while.
In other markets GBP was under pressure and the Yen too remains pressure up near 1.02 this morning. We continue to favour a move to 1.035o for USDJPY.
On commodities Gold reveresed off the $1475 resistance and selling zone once again and it looks like the bounce and its momentum off the lows of recent times is fading and we are back to looking for lower levels. Gold closed down 2.18% at $1447 while Silver is 1.03% to $23.73 oz. Crude had a wild days trade before closing down 0.36% at $95.97. Dr Copper was up 0.43%.
In Australia we have Home loans and the NAB Business survey – if you want a real read on the economy here it is today.
Industrial production and retail sales in China and then retail sales in the US tonight.