Vantage FX | Fiscal Cliff hope abounds, stocks surge but Gold and Aussie dollar fall | 19th December 2012

December 19, 2012

Fiscal cliff optimism was the key driver once again as there were more signs that the two sides of American politics are getting closer to a deal on the Fiscal Cliff overnight pushed stocks sharply higher and took the safe haven bid out of the US and, strangely, the Australian dollar. Gold also was hit hard and is very close to breaking a multi year trendline.

What seems to have buoyed markets is the movement by Barrack Obama from the $250,000 lower limit up to $400,000 for tax hikes. Equally however in a meeting with his fellow Republicans House Leader John Boehner has reasserted his authority to deal with the White House. Reuters reported,

Despite concerns of a revolt by Republicans in the House, Boehner emerged from a meeting with his members unscathed and pledged to press forward on negotiations with the White House. Boehner’s concession last week to consider higher tax rates on the wealthiest Americans – an idea long fought by his party – signaled that a deal was possible ahead of a year-end deadline.

Republican Representative Darrell Issa, a key committee chairman, said House Republicans “were supportive of the speaker. … I saw no one there get up and say, ‘I can’t support the speaker.'” Boehner is the top Republican in Congress.

For all the head winds faced by the US economy at the moment this is unequivocally good news as lawmakers march toward a deal and markets are reacting in a quite rational manner in rallying.  Given all the negativity that was available this year whether it was Greece, Spain, Italy or the Cliff as the fog lifts toward thin year end trade there is every chance now that markets surge into the year end close.

As you can see in the S&P 500 chart above the weekly technicals suggest that a move back to this year’s highs at 1480 is now possible. This is also possible given the recent stability of price as the S&P has been dancing on the spot for a long time now building momentum for a break – which appears to be higher.

There was no significant data released overnight except for UK inflation which was unchanged on the month from last month’s 0.6% rise. Year on year inflation rates sits at 3%.

Stocks

At the close Europe was strong on the back of the US Fiscal lead with the FTSE up 0.4%, the DAX up 0.64% and the CAC rose 0.29%. Milanese stocks were up 0.94% while in Madrid they rose 1.60%. Worth noting is that Greece was upgraded from selective default by S&P overnight.

In the US with 23 minutes before the close the NASDAQ is leading the charge higher up 1.31%, the Dow is up 0.68% and the S&P 500 is up 0.88% to 1444.

In Asia yesterday the Nikkei was stronger again as money flowed into the stock markets in the wake of the Abe election rising 0.96%. Shanghai and Hong Kong were fairly quite rising 0.08% and falling 0.8% respectively. In Australia the All Ords was up 0.49% and the SPI is higher again in overnight trade but not yet taken out the recent high as you can see in the chart below.

Global FX

The Australian dollar fell overnight even as the US dollar fell and risk markets rallied. This is very different to what you would usually expect to see from the Australian dollar which is rightly still viewed as a global risk proxy but it could be we are seeing a rotation in risk. By that I would highlight that last night gold tanked and copper was lower by 0.49%.

I have characterized the Aussie dollar as a safe harbour in a storm as opposed to a safe haven so although some might argue the AUD fall with the US dollar could suggest it really is now a safe haven equally it could simply be that my hypothesis that if the sun comes out money will flow out of Australia is equally true.

Also we know the market is very long the AUD, or at least the futures traders we use as proxies are with an all time high net long position, so that is also a big headwind.

As you can see in the chart above the Aussie is still in an overall uptrend from the 1.0150 low of a few months back but is stalling its momentum. Support is the old trendline that it broke up through at 1.0515.

But the Euro was the big winner overnight decisively breaking is through the range top and looking biased into the mid 1.30’s as we noted yesterday.

The weekly chart above shows the scale of the potential rally. This set up is one of my favourites to trade and the target would be the 138.2% level which comes in at 1.3587 but with a stop at the 200 day moving average on the way – this level is 1.3518.

Elsewhere USDJPY is up 0.39% on the day at 84.19 and most of the “orphans” I highlighted yesterday have been covered with the last 24 hours trade pointing these Yen crosses higher. GBP is up 0.24% to 1.6247 and close to the recent high at 1.6306 which I would see as resistance.

Commodities

Gold is the big mover last night down 1.55% to $1670 oz. It is now resting on very important long term trendline support. My personal and long term view is that I believe Gold is likely to tank in the next 6 months losing many hundreds of dollars an ounce but it has to break the trendline first.

Elsewhere Crude was up another 0.99% to $88.09 and headed toward $90 Bbl as we highlighted yesterday.

Data

Westpac leading Index in Australia today and then Japanese trade data and coincident and leading indices. German IFO is the key in Europe tonight and then housing starts and building permits in the US.

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