Macro Morning: Currency war

Stocks reversed yesterday’s disquiet and rallied overnight after the Bank of Japan (BoJ) set up a nice rally in Asian trade by joining the free money party with the Fed.

The BOJ’s action in increasing its bond buying program by another ¥10 trillion to ¥80 trillion on the back of its assessment of a further weakening in the economic outlook for the Japanese and global economies and that any recovery is at least 6 months away.  The BOJ also took away the floor on which it could buy bonds thus easing rates a little further, such as you can when they are effectively zero anyway, and extended the program of buying by another 6 months to the end of 2013.

The Japanese economy has had no self sustaining momentum for years now and remains utterly dependent on the global economy and the innovativeness, or not, of it’s corporate sector and the competitiveness of its corporations which is dependant on the strength of the Yen. So the easing is more symbolic than effective for the local economy – but was clearly aimed at trying to weaken the Yen. But the Fed has always trumped the BoJ and on that front is clearly trying to weaken the US dollar. So the early rally in USD/JPY (USD/JPY rally = Yen weakness) was reversed overnight and the USD/JPY is at 78.35 down 0.53% on the day. The currency wars are certainly back and the ECB is unlikely to be enjoying the euro’s rally much more than the BoJ is enjoying the Yen’s near multi year highs. But that is the price the ECB has paid for stabilising the Eurozone malaise for now.

But it wasn’t just the Japanese actions that got the US markets excited. The housing recovery is clearly continuing and coming just a day after we reported that Home Builder confidence was at multi-year highs we can now see why. Data overnight showed that housing starts rose 2.3% on the month while at the same time existing home sales increased 7.8% last month which is the fastest pace since May 2010. Elsewhere the prices of homes were reported to have risen 9.5% from a year ago. Whether sustainable or not the housing market has been recovering and that is a positive sign for the US economy.

So at the close of play the S&P 500 was up 0.31% to 1,463, the Dow was up 0.10% and the NASDAQ rose 0.15%. In specific stock news 3M followed Fed Ex’s report yesterday on weak trading conditions by saying that its expected revenue growth of 7-8% would now be a “stretch” target.

In Europe it seems it was the Japanese move that got things going but equally the US data was a positive as well. Concerns seem to be growing again about what Spain is up to insofar as it is dragging its feet on a bailout but at the close of play the FTSE was up 0.35%, the DAX up 0.59% and the CAC rose 0.54% and Madrid rose 0.44%.

On commodity markets crude’s slide continued and the CRB was off about 1% to 308.41. Before I get into the break down I want to highlight why headlines can sometimes be either misleading or appalling. Here is one I saw overnight:

Copper hits new 4-1/2 month top, demand worries resurface

Does that really make sense? The two bits of that headline seem somewhat incompatible. The reason that I raise it is because you need to be very careful with the filter you use when reading reports of what is happening in the economy or markets. That’s as true here sometimes as anywhere else – I have a view point I push and sometimes a headline to get attention. Ok often – but that’s just a dumb headline- at least we know what they are going to say if copper falls tomorrow.

Anyway at the close of play crude was down another 3.91% to $91.70 Bbl and crashed through the support zone we had identified at $93.80/94.00 as you can see on the chart. It pulled up at a low of exactly the 38.2% retracement of the June to September rally at n$91.60/65. My JimmyR indicator has not yet turned from positive to negative so this self off could be corrective yet. Tonight is the expiry of the near contract which also be contributing to the price action which has been appalling over the past few days. The fundamental news simply reinforced by the news Saudi Arabia is ready to man the pumps and reports of US inventories rose more than expectedd just added to the gloom and liquidation.

Elsewhere the Ags reversed the recent decline aggressively with corn, wheat and soybeans rising 2.18%, 2.004% and 1.77% respectively. Gold and silver were largely unchanged.

On FX markets as noted the Yen strengthened and the euro gave up its earlier gains against the US dollar as rumours floated round the market that Germany is doing its best to halt a euro banking union. It sits in the middle of the 24 hour range thought at 1.3049. Sterling was a little lower at 1.6220 now. The Australian dollar has improved, up to 1.0477 after making a high of 1.0495 overnight.

If you haven’t seen the article by Ross Garnaut about Australia and our future for living standards you need to read it. How and why the Australian dollar is still where it is when this is the future is hard to rationalise until you recognise that the big three central banks are engaged in a currency war. Add in the Swiss National Bank and the Bank of England and you see why with a Triple A rating a free float not too much government debt, relatively high interest rates and growth that although it might collapse hasn’t yet, the Aussie dollar is still so high. Aaarrrggghhh – but it is what it is and while it will turn eventually we are simply forced to follow the price action till then.

Lets have a look at some of the markets we follow using our AVATrade trading platform charts.

EUR/USD: The euro continues to be supported at 1.30 as suggested with the low in the past 24 hours 1.2997. JimmyR says its still a positive trend on both the 4 hour and 1 day charts so we expect weakness to be supported. Support 1.2995/1.3005, then 1.2913. Resistance 1.3080/85 and then 1.3167.

AUD/USD: JimmyR says the positive trend continues on the dailies and the AUD rallied of yesterday’s lows overnight . If the AUD can take out last night’s high at 1.0495 it should run toward the two overhead resistance levels on the 4 hour charts of 1.0513/15 and 1.0540. Above here 1.0570/75.  Support is 1.0414, 1.0425/35 and 1.0459.

DATA: HSBC Flash PMI today is the key for trade in Asia before many PMI’s are released in Europe tonight.

And here is how the markets closed at 6.25 this morning courtesy of AVATrade

Twitter: Greg McKenna . He is the Chief Investment Officer of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

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