Macro Morning: IMF trigger

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Following on from the World Bank’s downgrade of East Asian growth, the IMF yesterday cut its 2012 forecast for global growth from 3.5% to 3.3%, 2013 was also cut from 3.9% to 3.6%. As a consequence equities were generally lower across the markets and the US dollar rose. Importantly the IMF said there was a 1 in 6 chance that growth could slide below 2% globally in the next year – that is a global recession by any standards.

The US dollar of course benefitted from this and it seems clear as we enter earnings season and as Europe continues to confuse and deteriorate (IMF said France, Spain and others will miss thier deficit targets which implies more austerity and worse economic outcomes) that the US dollar and calls for its demise are pre-emptive. Obviously a good earnings season will prove this wrong but that is the set up I am seeing and I like the comments from the Lloyds strategy team overnight quoted in the Wall Street Journal:

“It seems clear that from a growth perspective the dollar looks better supported than European currencies, and with positioning now close to square in the euro, new impetus is required to extend the dollar decline of the last few months,”

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This is dead on the money – can positive shares kick the US dollar lower? Yes they can. We’ll have to wait and see but I’d rather be long than short US dollars at the moment.

So, at the close of European trade stocks were down but off their lows. The FTSE finished 0.54%, the DAX dropped 0.78% and the CAC fell 0.70%. Madrid was 1.83% and talking of Spain a newswire hit the headline overnight saying Spanish 10 years were back above 6% but they seem to have been confused about a change in benchmark and even though the Spanish 10 year was up 10 basis points to 5.82 in my experience a “bad tick” often precurses a move to that level – don’t ask me why.

In the US at the close the S&P 500 fell 0.9% to 1442 with stocks exposed to the economy such as consumer discretionary falling hardest. Why that was when the consumer confidence numbers were so strong is hard to fathom if you are trying to rationalise it – but we dont do that here, markets aren’t rational. The Dow fell 102 points or 0.7% and the NASDAQ fell 1.5%. Our SPI is pointing to a lower open here in Australia of about 32 points today.

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In commodity markets, oil bounced 3.1% as tensions in the Middle East escalate and it is now back toward the top of the recent range. Gold is the most interesting one for me as the 4 hour charts have turned negative as it has broken and then failed to get back above a 2 month, or there abouts, trendline. I’m targeting a move lower of around $30 to test the 200 period moving average.

On FX markets, the Aussie was the stand out yesterday pushing strongly through the previous days high and running up to a high of 1.0242 yesterday which was bang on the 1.382 Fibo projection of the break of the high and a great snip for the short term traders. When Europe entered, though, it got poleaxed and pushed back lower but it has performed fairly well all things considered, including the equity sell off and poor IMF news. It still sits at 1.0205 this morning.

The euro is not faring so well and it is off 110 points from the high of 1.2989 trading at 1.2875 as I write. Buffetted by US dollar strength and its own enduring problems including the protests in Greece when German Chancellor Merkel visited overnight the euro looks biased toward testing important support at 10.28 to see how strong this is. A break of 1.2790 would signal a much deeper retracement.

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Lets have a look at some Met4 charts from my AVATrade platform.

EUR/USD: Two days of sharply lower price action for the EUR and the break of the recent one week uptrend. 1.2790/1.2800 is the key support level and bottom of the recent range as well as the 200 day moving average. JimmyR says its still a positive trend and only a break of 1.28 would probably change that. I am however looking for lower levels to test the support outlined.

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AUD/USD: The AUD is in a broad 1.0150-1.0260 range for the moment. The break of the previous days high yesterday saw an extension to the first Fibonacci projection of 1.382 around 1.0242 which contained again on the push higher overnight. Its range trading for the AUD at present and trading a shorter time frame unless or until either side of this range breaks is favoured.

Data: Westpac Consumer Sentiment is the key report in Australia today .

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Here is a snapshot of where markets sat this morning at 7am from MT4 at 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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