Macro Morning: King dollar

Not a great night if you are in the bullish camp with the Dow falling 100 points along with weakness in the euro,  The Australian dollar, crude oil and gold.

As you know my underlying fundamental bias is that the economy of the global is structurally weak and will lack sufficient demand for years yet to underpin the types of valuations that OMT and QE has tried and is engendering. Sometimes the market cares about this and other times it doesn’t but as a Macro Investor I always keep this as a core tenet in my investing. It’s one of the reason we lengthened the duration in the Macro Investor Income Portfolio this week. If you want to know why and how then have a squizz at this weeks edition.

But as I say, sometimes the market cares and other times it doesn’t – another ad for trend following obviously – but last night was one of those nights when the markets in the US did focus on the downside even if the reasons I’m reading about have been in persistent for a while now.

In the US Philadelphia Fed Governor Plosser is reported by Bloomberg to have said the Fed’s bond buying program wont work and:

 probably won’t boost growth or hiring and may jeopardize the central bank’s credibility

This added to the tone of concern about Europe where US markets were focussed on riots in Spain, Catalonia threatening to secede over a tax fight with Madrid and an impending punch up between the ECB and the Bundesbank – or at least rumours of it (see below).

So US equity markets turned down around the middle of the day even though the data flow had been good with the Richmond Fed Index back into expansion territory, Consumer Confidence surged, and the Case Shiller housing continuing to stabilise.

At the close of play the Dow was down 0.75% to 13,547 the S&P fell 1.05% to 1,441 and the NASDAQ dropped 1.36%. Apple was off 2.5% roughly but the most telling comment, and one I missed after the bell yesterday (hat tip BI) is the one from Catepillar which down graded guidance for 2015 saying:

“Our goal hasn’t changed but the economy has,”

That darn economy again!

In Europe the good data early from the US lifted stocks even though there is news that the Bundesbank is about to take the ECB to court over the bond buying program and Mario Draghi speaking injudiciously to German business leaders saying the Bundesbank is just plain wrong. Here comes Europe again possibly – family fights are always dangerous. At the close of play the FTSE was up 0.36%, the DAX 0.16% and the CAC rose 0.47%. Even Madrid was up but then again Europe has always seemed less worried about its own issues than the US and usually follows the US lead so I’d expect some European equity weakness in early trade this afternoon Asian time.

On commodity markets crude was off over 1% and the charts look like it is biased lower still towards the high $88 region and the 50% retracement suppport zone at $88.88 Bbl. Copper was flat as were corn and soybeans but wheat fell 0.62%. OJ fell another 3.22% after yesterday’s 5% fall and a few traders are probably licking their wounds or trading the break lower depending on their approach. Sugar was up over 2%.

In FX markets the US dollar was stronger which is probably half the reason why the US equity market fell. The euro dipped to a low 1.2892 and sits at 1.2905 as I write. The Australian dollar was under pressure as well dropping back to 1.0383 and is just above this important technical level. The Pound is also weak. In Canada the central bank said that the strong Canadian dollar was a drag on the economy for the past few years – just another victim in the US and European race to weaken their currencies at other nations economic expense.

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

EUR/USD: Support is large for the EUR at 1.2812 which the 38.2% retracement of the recent upmove. Unless or until that breaks this is just a consolidation but it is a level to watch. JimmyR says this is still a positive trend for the EUR and only a breach of 1.28 would change that structurally and my system based on this would exit its long.

AUD/USD: JimmyR says the AUD is still trendless presently and support we identified at 1.0389/84 has not broken – YET. But as I said yesterday the AUD feels like it is going lower. Support is 1.0389/84 which is last nights low for the second day in a row and the 38.2% retracement level of the recent move and one I’ll be watching today.  1.0359/64 and then if this lower level gives way its 1.0320. This would be a target for me to test support possibly lower. Overhead resistance levels on the 4 hour charts of 1.0462, 1.0490/95 (big) then 1.0513/23 and 1.0540.

DATA: New home sales in the US and some CPI’s in Europe tongiht.

Couple of issues with the Calender this morning it will be back next week.

And here is how the markets sat this morning at 6.30am 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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  1. If we see AUD take out that early Sept low, the charts would show a double top (pretty much) followed by a lower low. Some would call that a trend change. Trouble ahead for the carry trade? Last time this unwound from lofty levels the fall was precipitous.

    • Thanks for the reminder GSM. I keep thinking the Carry trade will continue given Bernank and Draghi very keen on printing unlimited money at zero.

      However, as you point out, if the carry traders start to lose on the currency then it becomes just another cascade downwards!

    • Deus Forex Machina

      Hi – sorry for late reply I was at a conference and Board meeting yesterday.

      I agree but it has to take out the low – when it does we’ll accelerate to the downside again but its really just about equities.