Macro Morning: Australian dollar finds the love

See the latest Australian dollar analysis here:

Australian dollar runs riot on BoJo win

There is no chance the RBA is going to cut rates in Australia today which should support the Aussie dollar which has staged a miraculous recovery from yesterday afternoon’s big dip and fall to a low of 1.0115. There are two reasons the RBA won’t cut. The first is that they don’t feel they need to at the moment and the second of course is why waste bullets if they might need them down the road as the simmering pot of European sludge risks boiling over again sometime in 2013.

Looking briefly at yesterday’s price action may give us a window into the next 24 hours. Clearly China was the key with the combination of the weaker than expected non-manaufacturing PMI  and the curb on property speculation driving Chinese equities substantially lower with the Shanghai composite down 3.67%. While the chart below covers the MT4 tradeable China A index you can see just how poorly the Chinese sharemarket was relative to everything else as at 6.30am Sydney time this morning.

The most amazing thing about this chart is that it doesn’t show how weak the Aussie was at one stage yesterday afternoon – more on that later.

Overnight though I was taken with the enduring sideshow of Italian politics. If Silvio Berlusconi and the euro did one thing for global markets it was to erase the memory of just how fractious Italain politics has been since the 40’s and how short the average lifespan of a government was in Italy. In the early days of my career, it always seemed that there was a new Prime Minister and a fresh election looming. So this deadlock, if we can call it that is nothing new. What is new is the stakes are so much higher now and it is not just Italy and its lira at risk but Europe and its euro.

So Pier Luigi Bersani’s ultimatum to Beppe Grillo to get in bed with him or it was back to the polls seems a bit like a red rag to a bull – to mix up my southern European metaphors – and seems unlikely to get the result he is looking for. Indeed why would Grillo who is on the ascendancy be sacred of the ballot box. Just a sign of more instability to come and we saw that in bond yields overnight with Italian rates heading up to 3 month highs with Italian stocks off another 0.85% while the euro was under pressure but has managed to hold firm.

Elsewhere in Europe things were a bit mixed with the CAC actually rising 0.27% while the FTSE fell 0.51% and the DAX fell 0.21%. Spain was also higher up 0.72%.

Across the pond in the US as we approach the close with 8 minutes to go the Dow is up 0.18%, the Nasdaq rose 0.29% and the S&P 500 is up 5 points to 1523 for a gain of 0.32%. Either my charts aren’t updating or nothing has happened for the past hour.

Indeed euro is actually managing to stage a late rally toward the close of New York markets which is pretty impressive in a technical sense but the range of 1.3031 to 1.2980 isn’t that large in the grand scheme of what we have been seeing recently. GBP had a better day though up 0.44% to 1.5096 after another big figure range with a low at 1.4998 and a high of 1.5102.  GBP is very oversold and a rally or a pause in the fall would still be consistent with our view that the pound is headed lower in time. It seems that support is coming back in the pound via the EURGBP cross which make enormous sense.

In Japan putative BoJ Governor Kuroda was aggressively talking up the likelihood of massive monetary stimulus saying that:

It would be natural for the BOJ to buy longer-dated government bonds in huge amounts…But the central bank also needs to scrutinize market developments at the time, as well as the potential drawbacks.

USDJPY needs to take out the recent high to kick on rather than continue the consolidation pattern it is in.

Turning to the Aussie, I have said for a few days now that I expected it to fall toward the 1.0090/1.01 region and it traded down to a low of 1.0115 overnight after cascading lower on the day. Our pivot point analysis came in very handy yesterday as it highlighted 1.0207 as the crucial point but also highlighted that we’d rather sell because this level was below our two very short term moving averages we watch. It was the same for the euro. Unfortunately I decided to short the euro instead of the Aussie for a change and only captured relatively few points relative to the big crash in the Aussie after the weaker than expected building permits and the Chinese open. Late yesterday afternoon Aussie breached 1.0150 which saw heavy selling enter the market driving the Aussie into the 20’s and eventually to the low of 1.0115. Miraculously though the Aussie sits at 1.0187 as we write this morning.

As you can see in the chart above, the Aussie found support near the trendline that matches up all the lows since the middle of last year and which also satisfies our “round turn” chart pattern we often see in many markets and many time frames. Indeed such an approach makes me a lot of money. Now with regard to the trend line support sure it is in a slight down trend but it looks fairly solid for now. Candlestickwise this recovery is also very strong and there is a chance of a bounce, which I’d think capped, into the 1.0250 and perhaps a little higher.

On commodity markets Nymex crude’s slide continues with it dropping 0.67% to $90.07 Bbl. Oil has been in a down trend for a couple of weeks now as the US dollar has been strengthening and as this has combined with a reappraisal of the path of global growth this year and next particularly in Europe and more recently China. This was summed up nicely in a Reuters report this morning:

“Economic sentiment has shifted, and we’re also seeing the first stages of long liquidation in the oil market. Money managers had increased their exposure (to oil) a lot over a 10-week period,” said energy analyst Tim Evans at Citi Futures in New York.

Gold and silver did not move much daya on day at $1,569 and $28.48 and ounce respectively. Wheat collapsed 2.38% while soybeans rose 1.84% and corn was rather boring in comparison off just 0.17%

Data

The RBA is unlikely to cut rates today and it is also unlikely to be overly dovish in my estimation given recent comments from Governor Stevens. So this could be supportive for the Aussie dollar and hit bond futures. On the data front the AIG performance of services index is to be released along with the current account and retail sales. Then it is into the raft of Services PMI’s that are due out around the rest of the world. starting in China today in our time zone then Portugal, Italy, France, Germany, UK and the Eurozone tonight before the ISM non-manufacturing PMI in the US.

Twitter: Greg McKenna

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