Vantage FX | Taper Talk, a weak USD and a GBP rally | 8 August 2013

August 8, 2013

Recap 

  • Following on from Charles Evans the previous day more Taper talk weighed on stocks overnight with Cleveland Fed boss Sandra Pianalto saying there had been “clearer signs of a more sustained recovery” in the US jobs market and that “In light of this progress, and if the labor market remains on the stronger path that it has followed since last fall, then I would be prepared to scale back the monthly pace of asset purchases,”. 
  • No when, but the how was enough to weigh on Stocks in the US a little with the Dow (-48 pts, -0.31% @15,471), Nasdaq (-12 pts, -0.32% @3,654) and the S&P 500 (-6 pts, -0.38% @1,691) were all lower as no other catalysts emerged to offset the taper talk. It was similar in Frankfurt which was down around 0.5% while the FTSE had BoE troubles as well and it fell 1.41%. French, Italian and Spanish stocks were all higher.
  • The BoE gave forward guidance on the path of rates and like the Fed some targets for unemployment and growth but Sterling rallied because in doing so the BoE was less aggressive and dovish than the market had factored in. GBP (1.5490) is up 0.93% but crashed into overhead resistance.
  • ON other FX Markets USDJPY (96.44, -1.31%) is the big mover as we run up to the BoJ policy decision later today and however inexplicable this is Yen bulls have the ascendancy. Euro (1.3338, +0.25%) and AUD (0.8991, +0.1%) recovered from losses in mid morning European trade dragged higher by the Sterling and Yen induced USD weakness.
  • On rates markets the Taper talk didn’t seem to matter in the US with a strong 10 year Treasury auction and a continued rally with a fall of 5 bps to 2.60%, German 10’s settled at 1.69% while in the UK the 10’s closed at 2.49%.
  • On Commodity markets Nymex Crude (-1.06%, $104.18 Bbl) was lower after a smaller than expected draw in the EIA data of just 1.3 million Bbls versus the 2 million draw expected. Gold ($1287, +0.23%) was up a smidge as was Dr Copper ($3.19 lb, +0.17%). Corn (-0.79%) and Wheat (-1.15%) were lower but Soybeans rose 0.26%.
  • Watch out at the coffee shop this morning though Coffee was up 1.99%, your hot chocolate might be dearer to with Cocoa rising 3.16% and sugar was up 1.45%. Maybe it’s a day for Juice with OJ down 1.39%.

On the data front it is another big day for Australia with the release of the employment data but before that we get Japanese current account and investment data and a Bank of Korea interest rate decision. New loans data in China is likely to be closely watched as will the BoJ statement and German Trade data when Europe enters the fray. As ever, Thursday is also initial jobless claims day.

Has Mark Carney lost HIS lustre

This whole central bank regime that we have now of “forward guidance” on interest rates was largely one that BoE Governor Mark Carney came up with when he was the head of the Bank of Canada. It was employed by him there, has been employed by the Fed and now also at his new shop, the Bank of England.

Last night at the his first quarterly inflation report Carney committed the BoE to keep rates low which is what the market expected. But was not expected was that the BoE was far less Dovish than the market expected insofar as it tied the policy of low rates and QE to economic outcomes. As appropriate as this may be the market had been expecting Carney to be more accommodative but by putting both an unemployment target (7%) and an inflation target (2.4%) Carney has both signalled low rates but no more QE which has disappointed markets, hit the FTSE and has driven GBP sharply higher against both the USD and Euro, amongst others.

Looking at GBPUSD we can see the strong rally in the past couple of days rising strongly from the 1.5120 region back to a high overnight of 1.5530 before pulling back a little into the 1.5480 high region this morning.

It is slightly overcooked on the short term charts  and if I look at the Dailies I see some serious overhead resistance in the mid 1.55 region from the 200 day moving average, old uptrend line that it has broken down and then the trend channel top which converges with the other line you can see on the chart below at 1.5882 today.

The Aussie and USDJPY are going to be the focus in Asia today but a lazy GBP short with a big old stop might prove a good strategy for the next 48 hours.

Unemployment the key to the Aussie this morning

Unemployment is arguably the most watched data release in Australia each month. Personally I prefer to watch the NAB business survey as I think it is a better indicator and is certainly subject to less monthly volatility and noise but the employment data is a favourite of the market.

Today will be no exception given that the market has gotten the notion that the RBA is now on hold and as such as bid the Aussie up. Last month we saw a rise of 10,300 made up of a small fulltime fall of 4400 and a rise in part time of around 14, 700. This month the market is looking for a rise in employment of 6,200.

Employment is not a number I forecast nor is it a number that I usually trade in front of because it is such a volatile beast. Indeed I stopped trading it back in about 1990 or 1991 soon after I started trading when I learnt the size of the standard deviation of the number relative to the actual monthly release and expectations of the punditry.

Today will be no different but there will likely be opportunities to profit after the number has been released.

You can see in the chart above the sell off back to support in the 0.8930 region last night and the rally to the high of 0.9024. I remain of the view that unless or until the AUDUSD trades up and through 0.9035 that it is still in the lower box. A break is a chance for a decisive move higher while a weak employment number today would see AUD run back to support at 0.8930 and if that breaks 0.8840/60.

Good Hunting

Greg

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