Vantage FX | Liftoff, stocks surge, AUD near 1.05, USD fights back| 3rd January 2012

January 3, 2013

The Punditry has been full of pessimism in the past 20 odd hours since the Cliff deal was passed by the House yesterday morning – “watch out for the debt ceiling negotiations”, “the US needs to stabilise its debt position”, “this deal doesn’t fix anything” and so on.

But the markets don’t care and aren’t listening and even though the US stock market is a little off the highs for the night it has been a solid back to back upsurge in trade over the first two trading days of this week. Just like 2012 when there were many headwinds and much fear but stock markets managed to rally more than 10% in many jurisdictions while climbing a wall of worry so it might be that in 2013 as the headwinds dissipate further gains are seen – at least initially.

The US dollar was under pressure early but fought back strongly however the Aussie Dollar surged  making a high above 1.05 before pulling back, Crude rose more than 1%, Gold 0.78% and Silver and Copper were both more than 2% higher.

All in all a good night for stocks and a good night for risk.

It wasn’t just the cliff deal though that was the key positive news in the past day with the release of the raft of manufacturing purchasing managers indices pointing to an improved global economy even though Europe does seem to have enduring problems.

The Chinese and US data is the most encouraging and while Europe remains mixed if China and the US continue to recover then as we wrote yesterday Germany will certainly benefit soon and with it then ultimately the rest of Europe. That is not to say we are suddenly bullish the global economy it is simply the case that after 5 years or weakness history does suggest that some strength would usually start to emerge.

In the end though the ability of Stocks to hold up over the long run will be determined by revenues and earnings and the risks that remain for markets are clearly still strong whether they be the Sovereign problems of Europe or the debt bomb of the globe more generally.

But economics is not always the market and the market is not always the economy – that is why we are strategists not economists. There is a very big difference – we live and die by our calls and the impact on our trading account.

Stocks

As noted above the US markets had a good night and very good cumulative return over the first two trading days of the week. This is largely what explains the outperformance of the European markets, many of which were either closed or had half days earlier this week.

At the close the FTSE was 2.19% higher, the DAX rose a similar amount and the CAC had another great night moving 2.55% higher. The peripheral markets of Milan and Madrid rose 3.81% and 3.43% respectively. Angela Merkel reiterated over the weekend that the Euro crisis has much further to go – and so it has – but for the moment positivity is the key.

In the US with 20 minutes before the close the Dow is having its second triple digit rally in a row and is up 258 points or 1.97% at 13361. The S&P 500 is up 2.16% to 1456 and the Nasdaq is having another outperformance with a rise of 2.73%. We were stopped out of last week’s short on the S&P – that’s trend following folks.

In Asia yesterday with China and Japan on holiday’s the Hang Seng led the way north to a rally of 2.89% while in Australia the All Ords rose 1.25% which is its highest close since May 2011.

Global FX

The Euro surged as the USD was under pressure with the rally in stocks and the usual loss associated with this type of move. But it fought back exceptionally well and in truth the Euro has done nothing except trade both sides of the range we have been talking about these last few days and highlighted by the turquoise box in the chart below.

So techincally as we have been saying the past few days, “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”. Last night’s low was 1.3155, the high 1.3299.

USDJPY continues to march higher and continues to look extremely overcooked but as we noted yesterday our trend following systems are still long.  With a risk rally and a Prime Minister and Cabinet pushing the BoJ to act the trend toward 99 that we have been calling for some time now looks intact longer term but  we are expecting some sort of pullback within the overall multi-quarter uptrend.

Looking at the Aussie it caught up with the move in stocks in our time zone yesterday but was solidly left behind overnight as you can see in the chart below.

But we aren’t sure that the Aussie can catch up this morning or tonight – although arguing with the chart above is clearly fraught with danger even if correlations are not static.

Looking at the technicals directly we see that the last 24 hours trade has seen a huge range of 1.0372 to 1.0525 relative to the ATR of the past 20 days of less than 60 points. The inability of the Aussie to hold back above the old down trend line and the look of the 1 and 4 hour charts suggests a consolidation/pullback today toward 1.0450/60 and if that gives way then 1.0430. A break of last nights high would send the AUD toward the past few months high at 1.0585.

Commodities

As noted above Crude, Gold, Silver and Copper all rallied even though the US dollar has ended stronger against the Euro, flat against GBP and up against the Yen which suggests that these moves are sustainable.

As noted yesterday “Gold’s move is important as in December it broke the multi year uptrend but was able to recover and push away from that level for months end. Gold has been higher each year for a decade now so the trend remains intact – for now.”

Catch me on Twitter @gregorymckenna or @FX_Global

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