Stocks in Europe and the US were lower overnight amid weak German data and a US economic flow that supports moves toward the taper which is likely to be front and centre to tonight’s trade.
On FX markets the US dollar was a little weaker even though its data flow was stronger relative to Europe while the Aussie dollar caught a very strong lift from the RBA minutes which were a catalyst for some serious position squeezing and squaring.
On Commodity markets Gold was up a little, Oil and Copper down while Corn and Soybeans were higher
Position squaring hits FX markets
The minutes from the RBA’s July meeting were released yesterday and I confess to reading something that said the Board was pretty happy with where things were, thought the Aussie Dollar was still “remained at a high level” and that,
it was possible that the exchange rate would depreciate further over time as the terms of trade and mining investment declined, which would help to foster a rebalancing of growth in the economy.
But the market focussed on the paragraph that said,
Given the exchange rate adjustment that was occurring, and with the substantial degree of monetary stimulus already in place, members assessed the current stance of policy to be appropriate for the time being.
The result was that the AUD sits at around 0.9250 this morning after a low of 0.9082 yesterday.
There is no point me arguing with the market move, that would be silly and counter to my process but I do believe that the NAB survey and employment data since the meeting suggests more not less chance that the RBA will be cutting again soon – perhaps in a couple for weeks. Rather the focus is clearly that the market is still very short as I noted yesterday morning.
Indeed the other thing I noted yesterday was that the Aussie would probably get a lift from the minutes and that a “move through 0.9120/30 would open up decent topside run” but I still managed to get myself caught short which is a bit silly when you think about it and highlights the difference between rhetoric and trading once again – I have given myself an upper cut and we move on.
As you can see in the chart above the Aussie is back in the top half of the Darvasian box it has been in on the 4 hour charts for a while now. It remains the case that a break of 0.9330 is required to turn the outlook back to the topside but after the trade below 90 cents on Friday night if this happens it will be one heck of a reversal and shorts will be scrambling – if it happens.
On other FX markets even though the ZEW survey of economic sentiment in Germany printed weaker than expected at 36.3 and down from last months 38.5 and even thought EUR export and import data released last night was weak the Euro managed to stage a rally mainly because of USD position squaring I reckon. As discussed yesterday positioning is, or probably now was, very US bullish and bearish the AUD, JPY, GBP and EUR making traders nervous in the run up to Bernanke tonight.
But as I discuss below even though the Fed Chairman is likely to continue to push his nuanced argument between taper and low rates – which is of course a risk to the USD bull case short term – the data last night reinforces the economy is readying itself for the taper or at least is no longer an impediment.
Anyway in any real sense the Euro needs to break 1.3220 now which is last week’s high to kick on significantly after clearing short term resistance last night. GBP similarly broke short term resistance but needs to clear 1.5225 to kick on.
Dollar Yen is looking a little precarious and at risk of a deeper move lower which might be a warning for a bigger USD move 98.80 remains the short term key as noted yesterday and the overnight low was 98.88.
Stocks a little weaker
I guess it makes sense for the S&P to both back away from the high and for traders to lighten their load in the run up to Fed Chairman Bernanke’s address and questions tonight up on Capitol Hill. This is particularly the case given that inflation data last night in the US showed less risk of deflation (+0.5% in June and +1.8% yoy) while industrial production (+0.3%) and capacity utilisation (77.8%) were both a little better than expected and as such give less risk that Septaper will be delayed.
Indeed the above is consistent with what noted Fed watcher Jon Hilsenrath wrote in an article overnight,
The Fed’s plans hinge on economic growth picking up, super-low inflation returning to 2% and hiring staying strong. But the Fed would rethink its timetable if the economy doesn’t deliver on these expectations.
He wrote a much more detailed article but I think the above encapsulates the key theme and accords with my thinking as well. At present I’m watching jobless claims and the big jump last week as a potential derailer of Septaper but for the moment it still seems to be coming.
Anyway at the close the S&P 500 was down 0.39% or 7 points to 1676, the Nasdaq of 0.21% and the Nasdaq off 0.24%. Clearly these moves are about Bernanke because the data was ok and the NAHB home building index was at its highest level sine 2006.
Over in Europe the weak data leaves no one in any doubt just how bad the economy is doing among the 17 nations that make up the zone (well perhaps with the exception of Euro traders) and stocks were lower across the board with the FTSE 0.46% lower, the DAX fell 0.41%, the CAC fell 0.71%, Milan was down 0.43% and the IBEX was 0.73% lower.
Today we see the Westpac Leading index in Australia, BoE minutes and employment data in the UK, go down Sterling!, before Mortgage Aps and building permits in the US along with housing starts, the Beige book and the EIA crude stocks which has been so much responsible for the Crude surge recently.