Macro Morning: King dollar returns

See the latest Australian dollar analysis here:

Macro Morning

The US dollar is doing something very strange at the moment. Well, not that strange, after all it’s really just something that we haven’t seen for a while. That is, the US dollar seems to be re-establishing a positive correlation with moves in the stock market and is rallying along with the Dow and the S&P.

Of course that makes sense if you hold the view, like I do, that FX markets are usually a beauty contest and at present are a least ugly contest. On that basis the US dollar is the least ugly of the big 4 currencies of the euro, yen and pound, all of which have been under pressure lately. The surge in the Japanese yen and the Nikkei last week was amazing and the euro’s weak end to the week and further weak open this morning continues to bias it toward 1.2650. But this US dollar strength is the remarkable move for the moment. The bulls and the bears can argue all they like about the state of the stock market rally but it seems the US dollar’s rally is really only getting going.

That will have an impact on gold and the Aussie dollar as both of which will lose their safe haven and safe harbour bid respectively in the weeks and months ahead if this rally endures. Of course that is unknowable but for the moment the US dollar’s trend is your friend.

This strength in non-farm payrolls which rose 263,000 allowed the Dow Jones to finish the week at a fresh all-time closing high up 68 points or 0.5% to 14,397. The S&P 500 added around 7 points or 0.5% itself to sit just 14 points from the all time closing the week at 1,551. The Nasdaq was up 0.4% to 3,244. It seems for the moment that  the Goldilocks equity market backdrop continues with an economy showing enough signs of life to boost stocks prices but not enough signs to rush the Fed to the exit doors from its bond buying or zero interest rates.

Last week’s stock moves coming at such a mature stage in the equity market rally off the 2009 lows was truly remarkable but this uptrend that has persisted for some months continues.

s&p 500, spx, s&p 500 chart

There is a little bit of resistance looming overhead for the S&P as you can see in the chart above. If we measure the rally from the May low last year to the September high before the pullback then the 1.382 move of this rally is just overhead in the 1554 zone. As mystical as Fibonacci projections are, and as distasteful as some traders find them, over the years one of our favourite strategies has been to measure a move and wait for it to break and then run to a projection such as this.

European stock markets were of course buoyed by the moves in the Dow and S&P but due to their recent Italian election induced weakness and a little bit of under-performance recently they handily outpointed US stocks on the week. Looking at Friday’s trade though the FTSE was up 0.70%, the DAX up 0.58% and the recently more volatile CAC was up 1.22%. The Club Med pairing of Italian and Spanish stocks roared higher rising 1.61% and 2.85% respectively.

aud, audusd, australian dollar, australian dollar price quote, audusd

For the Australian dollar the triple rejection of the 1.03 region last week reinforces the top of the box and it has opened weaker in Sydney morning trading than where it closed Saturday morning trading at 1.02 this morning. The overall outlook for the Aussie in a more positive stock market environment should also be positive, particularly if that positivity is sourced, at least to some extent, by an improving US economy. But as a safe harbour during the dark days of the GFC the opposite is now probably true as money gets put to work elsewhere. So the Aussie remains within the 1.01-1.03 box but seems biased toward the bottom to find real support.

eur, eurusd, euro, euro (eur) price quote

As you can see in the chart above, a break of the 1.2950 level would signal a deeper move down toward our target of 1.2650. Worth noting is the inability of the euro’s rally last week to get up and through our fast moving average which reinforces the downtrend is intact.

Elsewhere on commodity markets you would not have wanted to be short Frozen Orange Juice which surged 7.1% on Friday (at least according to Reuters). This is a phenomenal move for one day and given we don’t trade it we wonder where the exchanges circuit breakers are on this one. A move such as this will cause margins to increase which just might get it to reverse.

Anyway to markets we can trade, crude was up a little at $91.87 a Bbl for a gain of 0.43%. Gold was up 0.11% and silver rose 0.49%. Corn was up 1.93%, wheat rose 0.47% and soybeans were 0.33% higher.

Data

It’s CPI week all over the world this week  which kicked off with slightly higher than expected Chinese data yesterday with prices up 1.1% mom and 3.2% yoy in February. This morning we get New Zealand Electronic Card sales  and then Japanese machinery orders. We will be very interested tonight in the German trade data and whether or not the Chinese recovery has had any impact on Germany. This data could be an important trigger point for the Euro as might the Italian, Greek and Portugeuse GDP results be.

Twitter: Greg McKenna

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