Vantage FX | Fiscal Cliff deal down to the wire, stocks and Aussie Dollar pressured | 31st December 2012

December 31, 2012

Friday night’s big falls in the S&P 500 and the Dow is possibly the best thing that has happened in the past few weeks to push the ever self indulgent politico class toward some sort of deal over the fiscal cliff.

But as we’ve written often lately we should never underestimate the ability of the political class to push things to and through the limit in a game of brinkmanship as they remain fascinated with their own importance and forget about the real impact of their decisions. So as we have just 1 day to go in US time before the cliff the Senate and the House are feverishly still trying to hammer out a deal that can pass by the deadline or at least patch something together that can pass.

But having waited till now to sort things out and with John Boehner’s authority as the leader of the Republicans in the House less strong than it has been we remain wary that even though the President has the better hand and even though he is positioning the Republican’s nicely as the villains in this drama there is no guarantee that a deal will be done in the time allotted.

So today and tonight’s pre-holiday trade could be volatile in either direction as trade goes with the flow of news headlines.

The latest one from CNBC is that there has been a “major setback” in talks.

So all we have is price to lead us and on that front the sharp fall in the S&P 500 on Friday and the related move in the futures we track has left the index right on the support we noted last week.

I noted on Friday that my indicators were pointing lower and one of my trend following systems is now short (on a futures basis) at 1395 with a stop at 1428.35. Small position with 1% equity at risk – dangerous at a time like this but if you have a process and you get signals then you have to take those signals. If a deal is done there is a risk of a 1% loss but if a deal is not done – well we’ll see.

Stocks

Anyway on the physical market at the close the Dow was off 1.21% or 158 points to 12938 while the S&P 500 closed at the previous day’s low of 1402 for a loss of 15.67 points or 1.10%. The Nasdaq was 0.86% lower.

In Europe Frankfurt closed the year (it’s a holiday today) with a fall of 0.57% at 7612 but over the year but having closed 2011 at 5894 the DAX is up more than 29% in 2012 which is a phenomenal performance given the economic and political headwinds that it has faced. As you can see in the chart below from VantageFX (yes you can trade the DAX and other Indices) it  looks like an interim top might be in place.

In other European markets the FTSE closed Friday down 0.49% while the CAC was off 1.48%. Milanese stocks fell 0.82% while in Spain stocks fell 1.81%.

Looking back to Asia on Friday it was a more positive day with gains in most markets so look for these to be unwound sharply if a deal is not done today.

Global FX

bad news for the equity markets even though it is sourced in the US and firmly of the making of US lawmakers is still good news for the US dollar and so it was again on Friday night. This combination stopped the Aussie’s rally against the US in its tracks as you can see in the chart below showing the 4 hour chart of the Aussie versus the S&P 500.

The key downside level is 1.0342 in the short term and a move below here would open the way lower. After two days of looking for an Aussie Dollar rally it is clear it will only eventuate in the short term if a deal to avert the cliff is done and stocks rally. Against the crosses the Aussie did better largely across the board except for GBP and this may continue if the weakness continues in stocks.

The Euro is still dancing on the spot and only a break of 1.3150 would open the way lower or a push up and through 1.3315 giving more topside momentum. This range is defined in the turquoise box on the chart above.

Dollar Yen hit, breached but closed below the trendline we have been targeting for a while now on Friday and unless or until we see a close above that level then it should remain resistance. There is a chance that an interim top is in for USDJPY but overall the trend to a substantially weaker Yen over coming quarters is in train – just like new PM Abe wanted.

Commodities

The 200 day moving average was once again solid resistance for the Nymex Crude contract and $91.71 is a key level in the short term as a result. Crude closed at $90.62 Bbl. On the precious stuff Silver was off 0.87% to $30.04 oz. while Gold dropped 0.47% to $1653 and is resting on trendline again. $1635 remains the level that would see me call a trend chain.

Catch me on Twitter @gregorymckenna or @FX_Global

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