More of the same overnight with another round of weak data in the US as jobless claims rose 30,000 to 360,000 which is a six week high. The Philly Fed was also very weak dropping from 1.3 in April to -5.4 in May with the market having expected a rise to 2. Housing starts were also weaker than expected but so was inflation which to a certain extent mitigates the economic weakness because it takes any pressure off the Fed to swiftly begin taking back it’s stimulus efforts as inflation everywhere (except for stock prices) remains subdued.
That is not to say that the Fed isn’t warning on the “tapering” of its bond buying program as the Dallas Fed’s Richard Fisher put it in a speech yesterday afternoon Asian time but with weak growth and low inflation there is little rush except if you are worried about the goosing of stocks.
At the close the Dow finished at 15,233 down 0.28% on the day after it made a fresh intra day high at 15,302 earlier in the session. The S&P closed down 0.53% at 1,650 and the Nasdaq was 0.19% lower. In Europe the big markets of London, Frankfurt and Paris less than 0.1% either side of flat. Stocks in Milan rose 0.29% while stocks in Madrid fell 0.47%.
The Aussie came under pressure again last night and I’d observe that the lower it falls the worse things are getting for it rather than the closer it is to a turn. It has broken through support at 0.9857 trading down to a low of 0.9795 overnight and is in the very low 0.9800 region this morning.
Catching a falling knife is always dangerous as we found earlier this weak switching from short AUDUSD to short AUDJPY – we didn’t lose money, indeed we made money again on short AUDJPY yesterday before switching back into short AUDUSD – but we did miss an opportunity to be 70 or 80 points better off than our pocket book is now.
Part of the reason I am now short again is the big break of the weekly trend line and the 200 week moving average that occurred yesterday afternoon. Certainly we always respect channels and levels until they break and we had a target of 0.9857 in for a while now but the break of this channel opens the way for a move over many weeks to 0.9350.
Also if you are a fundamentalist the falling economic and inflation backdrop undermines the Aussie dollar as a safe harbour and our own sinking economy just builds on that. If I look at our five key drivers we talk about that drive the Aussie they are negative as well.
- Interest rate differentials – closing, negative for the Aussie;
- Investor Sentiment – turned on growth, inflation and the Aussie, negative for the Aussie;
- Global Growth – Yuk, negative for the Aussie;
- USD – least ugly in currency land, negative for the Aussie; and
- Technicals – the chart above speaks for itself, negative for the Aussie
So I guess the message is the trend is your friend and catching falling knives is a dangerous strategy.
On other FX markets the yen fought back again after the weak US data and we are of a mind to get short USDJPY somewhere soon, just waiting for the signal. Euro has to break 1.2840 which is the low for the past to days for it to kick lower.
Turning to commodities and Credit Suisse reckon that gold is headed down to $1100 in the next year and $1000 over a five year time horizon. the key reason behind this view, and one we have great sympathy with, is the falling inflation outlook and as a consequence the lack of need for gold as a hedge against inflation.
That seems a reasonable argument to me as does the fact that the price is still falling regardless of the gold bugs claims that physical buying is surging. Gold is just another market whose price action I follow and I am neither a gold bug or a gold hater – but at the moment I remain a gold bear because the price action tells me to be. Having said that though unless or until the recent lows at $1320 give way gold is in a basing pattern but if this level goes Credit Suisse might be right.
On commodity markets crude and Dr Copper both rose, no doubt on the back of the slightly weaker US dollar after the data last night up 0.87% and 0.77% respectively. As noted, gold fell 0.67 but silver has barely budged.
Japanese Machinery orders, Chinese leading economic indicator today and then a fairly quiet data night for Europe and the US.
Following on from the data on growth overnight we see Japanese GDP this morning along with Chinese FDI and then Japanese IP before Eurozone and US CPI before jobless claims, housing starts, building permits and Philly Fed in the US.
Twitter: Greg McKenna