Vantage FX | US Dollar rallies with stocks, Aussie opens week under pressure| 11th March 2013

March 11, 2013

Non-farm payrolls outpaced even the most optimistic of the punditry in February printing a rise of 263,000 with the unemployment rate down a smidge to 7.7%. The goldilocks equity market backdrop continues with an economy showing enough signs of life to boost stocks prices but not enough signs to rush the Fed to the exit doors from its bond buying or zero interest rates.

This data allowed the Dow Jones to finish the week at a fresh all-time closing high up 68 points or 0.5% to 14,397. The S&P 500 added around 7 points or 0.5% itself to sit just 14 points from the all time closing the week at 1,551. The Nasdaq was up 0.4% to 3,244.

Last week’s stock moves coming at such a mature stage in the equity market rally off the 2009 lows was truly remarkable as we noted in our weekly wrap over the weekend and while the bulls and the bears can have a great debate about whether or not the market can go higher or is setting itself up for a crash the reality is that the uptrend that has persisted for some months continues.

There is a little bit of resistance looming overhead for the S&P as you can see in the chart above. If we measure the rally from the May low last year to the September high before the pullback then the 1.382 move of this rally is just overhead in the 1554 zone. A mystical as Fibonacci projections are and as distasteful as some traders find them over the years one of our favourite strategies has always been to measure a move and wait for it to break and then run to a projection such as this. We have deviated from our long held references to these types of moves recently for some unknown reason but our trading has reacquainted us with them in the past week which is an interesting story in itself :).

European stock markets were of course buoyed by the moves in the Dow and S&P buut due to their recent Italian election induced weakness and a little bit of under performance recently they handily outpointed US stocks on the week. Looking at Friday’s trade though the FTSE was up 0.70%, the DAX up 0.58% and the recently more volatile CAC was up 1.22%. The Club Med pairing of Italian and Spanish stocks roared higher rising 1.61% and 2.85% respectively.

One of the more interesting aspects of this rally recently has been the changing fate of the US dollar. As we have mentioned recently individually we see more weakness in Euro, Sterling and the Yen on the basis of the usual FX market least ugly contest and the recovery in the US economy relative to the moribund state of these three economies. But for a large part of the recovery in stocks the relationship between the US dollar and stocks has been an inverse one as stocks have been boosted by Fed action which also had the impact of debasing the US dollar.

That is clearly not the case at the moment with the Euro looking headed toward our target of 1.2650, Sterling being biased toward the low 1.40’s and the Yen at 96 still selling off hard against the US dollar. This is the new paradigm we were referring to in the title of our weekly post. The re-emergence of currencies being driven by relative growth and by inference relative return rates. Now of course that means EUR, JPY and GBP will all be in a downward spiral and competition for weakness which is somewhat problematic all at once but what it does do is reinforce the move of the US dollar higher.

As you can see in the chart above a break of the 1.2950 level would signal a deeper move down toward our target of 1.2650. Worth noting is the inability of the Euro’s rally last week to get up and through our fast moving average which reinforces the downtrend is intact.

For the Australian dollar the triple rejection of the 1.03 region last week reinforces the top of the box and it has opened weaker in Sydney morning trading than where it closed Saturday morning trading at 1.02 this morning. The overall outlook for the Aussie in a more positive stock market environment should also be positive, particularly if that positivity is sourced, at least to some extent, by an improving US economy. But as a safe harbour during the dark days of the GFC the opposite is now probably true as money get put to work elsewhere. So the Aussie remains within the 1.01-1.03 box but seems biased toward the bottom to find real support.

Elsewhere on commodity markets you would not have wanted to be short Frozen Orange Juice which surged 7.1% on Friday (at least according to Reuters). this is a truly phenomenal move for one day and given we don’t trade it we wonder where the exchanges circuit breakers are on this one. A move such as this will cause margins to increase which just might get it to reverse.

Anyway to markets we can trade, Crude was up a little at $91.87 a Bbl for a gain of 0.43%. Gold was up 0.11% and Silver rose 0.49%. Corn was up 1.93%, wheat rose 0.47% and soybeans were 0.33% higher.

Data

It’s CPI week all over the world this week  which kicked off with slightly higher than expected Chinese data yesterday with prices up 1.1% mom and 3.2% yoy in February. This morning we get New Zealand Electronic Card sales  and then Japanese machinery orders. We will be very interested tonight in the German trade data and whether or not the Chinese recovery has had any impact on Germany. This data could be an important trigger point for the Euro as might the Italian, Greek and Portugeuse GDP results be.

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