Vantage FX | USD dollar reversal looming as Gold and Aussie rally| 13th March 2013

March 13, 2013

The Australian dollar has traded up and through our slow moving average for the first time since January 22 this year. That level of 1.0302 is a critical indicator that the Aussie might be due for an extension to the topside. Likewise the Euro seems to be forming a base around the 1.2960 region and even the poor old friendless Pound is managing to bounce back from acute intraday weakness for the second day in a row. Trying to call a top in the USDJPY rate is one thing we aren’t too keen on but when we look at the Nikkei and its relationship with the Yen there is a chance that a small fall from where it closed yesterday would be an indicator for a drop back to 11790 from 12163 yesterday.

Oh and of course gold has rallied strongly overnight up $13.70 oz or 0.87% to $1,591 and looks like it has further gains in train and copper looks like it has a rally coming too.

All of which adds up to a bunch of markets that look like they are going to reverse recent weakness and all of which adds up to a looming period of US dollar under performance. Now of course the above view has no basis in the fundamentals of the US economy or US dollar versus these markets and does not mean that we don’t thing the US dollar is not going to be stronger a quarter or two down the track but for the moment it might be time for a little rest in the US dollars rally and a pullback to find where support really is.

The USD Index is at 82.55 as we write and seems biased back to 81.50/90 which isn’t a huge move but a drop through this level would signal a deeper retracement – it has to drop through first though.

Looking specifically at overnight moves in FX Land the Euro made a low of 1.2990 and a high of 1.3074 to sit down 0.12% over the past 24 hours at 1.3026. GBP had another miraculous day although it still remains pressured making a low of 1.4829 before rebounding to sit at 1.49 now down just 0.1% on the day. USDCHF is unchanged. USDCAD up just 0.05% at 1.0261 and the Aussie is up 0.37% at 1.0314.

As the chart above shows there is a clear trade here for traders who are so disposed. Either buy now with a stop below the recent low or buy as/if Euro breaks up through our fast moving average which today would be a buy stop around 1.3021. Of course the usual disclaimers and caveats apply and you must look to your own risk metrics but based on our usual indicators this seems a reasonably good risk reward trade at the moment on EURUSD

Yesterday in Australia we saw the release of the NAB’s March Business survey was another reminder that the Australian economy remains troubled. Business confidence fell from 3 to 1 and Business conditions fell from -2 to -3. Profitability was lower as well from -2 to -5, forward orders tanked but employment improved a little from -6 to -3.

That all sounds pretty poor really, or at least representative of an economy that is in the doldrums. Subdued is the word the NAB like to use to characterise the Australian economic performance in prospect  and so it is that the NAB is still forecasting 2 25 basis point cuts. Sure its down from the 3 they were expecting up until now but it still very much at odds with the marginal moves that the market is now looking for over the course of the cycle from here.

But the data didn’t hurt the Aussie yesterday which has now broken up and through our 1.31/1.33 box. Indeed as we noted above the Aussie has not traded through nor closed above our slow moving average since late January this year. This is a sign that the weakness we have seen since then when the Aussie was above 1.05 is turning.

Looking at our usual indicators the chances of a move toward 1.04 are now high. Short term the 1.0335 high overnight is key short term resistance and the overbought nature of the 1 and 4 hour charts needs to be washed out of the market if this is to be breached. A drop through 1.0307 today would open up some shorter term weakness on the hourly charts.

Yesterday USDJPY reacted to comments from Koji Ishida who is a Board member of the BoJ and seemed to suggest that the new broom of incoming BoJ Governor Kuroda won’t be able to simply sweep aside opposition to destroying the BoJ’s credibility. Interestingly though the FT reports that Ishida was skeptical of the changes that Kuroda will usher in but teh Japan Times is bullish on his comments.

FT

Mr Ishida described the central bank’s 2 per cent inflation target as “very high” and said it was attainable only “if a wide range of players make progress in boosting the competitiveness and growth potential of the Japanese economy, along with powerful monetary easing”.

Japan Times

Bank of Japan Policy Board member Koji Ishida said Monday the central bank can attain its 2 percent inflation target and pledged the BOJ will carry out “large-scale” credit-easing for that purpose down the road.

“I believe (the inflation target) is fully achievable if the Bank of Japan promotes powerful monetary easing and efforts by a variety of entities to bolster Japan’s economic competitiveness and growth,” Ishida said in a speech in Utsunomiya.

The consumer price index “is likely to reach 1 percent on a monthly basis around the end of fiscal 2014,” Ishida said, implying he expects the CPI will rise to 2 percent after fiscal 2015, which starts that April, at the earliest.

Interesting isn’t it but either way the markets reaction suggests it might be a little long USDJPY.

On stock markets overnight we saw an end to the stellar run in US equities, well sort of, the Nasdaq was 0.33% lower, teh S&P 500 fell 0.27% and the Dow was off till right before the close when it staged a quick rally to post a 0.02% rise and another new record at 14,450. MarketWatch says that the 8 day streak is the best winning streak since February 2011.

In Europe the FTSE managed to post a 0.11% gain even with very weak UK data which showed Industrial Production fell 1.2% in January against an expectation of a 0.1% increase and the 1.1% last. The year on year contraction in IP fell to -2.9% when the punditry thought it would rise back to -1.1%. Manufacturing production was also weaker, much weaker than expected.

On the Continent the DAX fell 0.23%, the CAC rose 0.10% but Milanese stocks fell 0.42% while in Spain stocks dropped 0.26%.

On Commodity Markets Nymex Crude was up 0.53% to $92.55 after the EIA said that the market in 2013 will be slightly tighter than had been previously forecast on lower supplies from Libya and Iran. As noted above Gold was up 0.93% and Silver rose 1.11% to $29.15 oz. Copper rose 1%, Corn and Wheat rose 0.88% and 0.94% respectively but Soybeans fell 1.65%. Frozen Oj was up another 1.32%.

Gold is looking like it is time for a run higher and we would now target a move toward $1619 for the moment and then see how it looks from there.

Data

Westpac Consumer Confidence in Australia today along with home Loan data. European IP tonight along with MBA Mortgage applications in the US and more importantly Retail Sales for February. These data are very important for expectations about the recovery in the US and thus the stock market.

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