Vantage FX | USD King of the Hill as stocks hit new highs | 2 August 2013

August 2, 2013

Recap

  • Data and Central banks were the key overnight with the combination of a nascent economic recovery in Europe, improving recovery in the US and a reaffirmation of low rates for the long term for the 3 big Central banks (Fed, BoE and ECB) combining to push stocks and the US dollar higher across the bourses and board.
  • So it was new highs for the US stock market and at the close the Dow (+128 pts, 0.83% @15,628), Nasdaq (+50 pts, 1.37% @3,676) and the S&P 500 (+21 pts!, 1.26% @1,707) were all stronger and crucially closed around their highs of the day.
  • Stocks in Europe also got a lift from US sentiment but their own improving data also closing on the highs of the day. In the UK and on the continent it was a sea of green with the FTSE (+0.92%), DAX (+1.63%), CAC (+1.26%), FTSE MIB (Milan, +2.04%) and IBEX 35 (Madird, +1.26%) all finishing strongly.
  • In Australia the SPI200 is currently up 41 so it is going to be a good day , or at least a start to the day and we’ll see what the actual budgetary announcement a and bank deposit levy does to the market.
  • Turning to Global FX markets and it was the night when “King Dollar” resumed the throne. Euro (1.3209) is down more than a big figure, as is Sterling (1.5117) while USDJPY (99.54) is up almost 2 big figures and may approach resistance at 100 today.
  • Against this backdrop the Aussie did fairly well having already been hit hard against the USD the previous session so it gained on the crosses but still sits lower at 0.8927 this morning.
  • Looking at the data if we ignore Portugal the Markit PMI’s for Italy, Germany, UK, EU were all much better than expected although France missed by 0.1% while in the US the ISM manufacturing index fairly surged printing 55.4 against expectations of 51.5 for the best result in two years but just like the GDP data yesterday prices paid were lower than expected (49 v 53.8) – so the US just might be having a mini- Goldilocks moment which has to be good for stocks. Also out in the US was the jobless claims which dropped back to 326,000 from 346,000 previous.
  • Bonds didn’t like the strong data though which will worry the Fed with US 10 year yields rising 13 bps to 2.71% for a loss on the day of almost 5% which, if it was stocks, would be hitting the headlines very hard. Bunds (1.67%) were unchanged while Italian and Spanish bond yields fell a little on improved sentiment. In the UK gilts rose 4 bps to 2.40%.
  • On Commodity markets Nymex crude ($107.75) surged on the better data even though the US dollar strengthened for an incredibly strong result. Copper ($3.15 lb.) rallied 1.46% but Gold has slipped back to $1310 oz. and our friends Corn, Wheat and Soybeans were all under pressure again falling 2.40%, 0.94% and 1.18% respectively.

And of course we have 24 hours of trade left and still yet a monstrous outturn with the release of the non-farm payrolls tonight. Before that though we have Australian and European PPI and we also see personal income and consumption data in the US as well as the ISM in New York.

Good hunting and good luck today.

US dollar reigns supreme

The US dollar fairly soared over the last couple of days belting the Euro, Sterling, Yen and Aussie. Last night the Aussie seemed to hold in better than most probably because it had already been poleaxed over the past few days. The Yen however has really come back under pressure with a 200 point move overnight.

As you can see in the chart above USDJPY broke down into a mini box on the 4 hour charts but is now back inside the bigger consolidation range we saw for a large part of the last month. You could argue its a nice little W – double bottom and while it has probably achieved any target already decent resistance doesn’t come into play until around 100 which is the overhead trendline.

I have had a target in the low 89’s for ages now and that was achieved in the past few days and the overnight low was 0.8906. Now while the pressure on the Aussie remains we know from the CFTC data, which is likely to be reinforced tomorrow morning, that the short term market is very short. Now that does not in or of itself mean the Aussie should rally but there is some support around current levels in terms of the long term daily trend. The actual trendline on the weekly chart above comes in at 0.8830/50 so we’ll see how it goes.

Draghi signals lower rates – But its US data driving EURUSD

A big swathe of a reuters report below on Mario Draghi’s confernece overnight which reinforces that rates in the EU are going to be lower for longer even if the hurdle for another cut is unllikely at the present moment.

But before I get to that I want to talk about the drivers of the the EURUSD rate at the moment. If you look at the tooing and froing of the EUR over the past 6+ weeks it was about the taper and then when that seemed to come off the table, or was at least less aggressively pushed, the relative performance of economic data between the two regions took centre stage as I have shown before in the rate versus the Citibank economic surprise index. The last couple of nights US data has been strong even though EU data has also been on the higher side of expectations which tells you one very important thing.

If US data prints strong EUR will be pressured – if not then it will gain. So it’s not really about the taper at all its about the soft patch the US economy is going through. So if non-farm payrolls disappoint tonight don’t be caught short.

Here is what Draghi said as reported by Reuters this morning,

ECB President Mario Draghi hinted that policy would not be tightened until well into next year at the earliest, although the central bank will give no time horizon for when rates might move.

“Our monetary policy stance … provides support to a gradual recovery in economic activity in the remaining part of the year and in 2014,” Draghi told a news conference.

“The Governing Council confirms that it expects the key ECB rates to remain at present or lower levels for an extended period of time,” he said, reiterating last month’s first stab at giving forward guidance on rates.

That was unanimously supported by the 23-strong council, he said. Draghi was guarded, however, when pressed on whether the policymakers discussed a rate cut this month.

“We actually discussed only forward guidance, and within that … confirmation of forward guidance you have an implicit decision about today’s interest rates,” he said. “And the decision about forward guidance was in fact unanimous.”

Low rates for ages but remember this is less important than US data per se for EURUSD although you can lay the better performance of Bunds and the good rally in Italian and Spanish data directly at the feet of Draghi overnight.

Have a great day and weekend

Greg

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