Stocks and the US dollar were higher on Friday night as the trends continue to dominate markets. US 10 years rates were chased back from 2% last week by some buying but it seems that with all the talk of taper floating around the market is going to continue to keep upward pressure on yields. This is reinforcing the US dollar’s growing place in FX land as the least ugly currency du jour and quickly becoming the currency du mois or even du annee.
Of course these things are never straight line but as Chris wrote in his trading week note over the weekend:
Previously on the weekly chart I drew a “buy box” where it was apparent that there was some major repositioning or repatriation of USD going on, and after last week’s bullish engulfing candle incorporating the whole box area, there has been a clean breakout to new highs above the pre-QE3 period:
The biggest implications of this are for the euro which is headed back to the 1.21 zone. Indeed the euro made a low just below 1.28 and proof that you should always leave old trend lines on your charts it’s low was bang on the old uptrend line from 2012 euro broke through late last year.
Longer term as noted above I think euro is headed back to the 1.21 region because the worm has turned for the US dollar and as Morgan Stanley wrote over the weekend:
There has been a significant shift in global currency market dynamics over the course of the past week, driven not only by the JPY, but increasingly by the USD. We have discussed recently the potential change in the status of USD, with the US increasingly being seen as an investment destination and the USD being used less as a funding currency.
This process has continued over the past week, with further strong data from the US leading to a renewed rise in US treasury yields. This rise in US yields now places the USD into the basket of yielding currencies, which suggest further support is likely to
build over the over medium term.
Yes this is the big change in FX markets over the last little while and while euro rallies will occur and USD sell-offs can result the trend change is clear.
Which is also why gold is under pressure but the gold bugs are in a lather at the moment about what is really going in for the yellow metal as physical demand surges but paper gold keeps coming onto the market in waves and knocking the price lower. As I noted last week the fact that the paper market is overwhelming the actual physical buying is no different to when the reverse drove gold to the highs of the last year. Indeed it is a natural consequence of the unwinding in a deflationary global environment.
But Business Insider reports that Barrons reckons there might be some shenanigans going on in the gold market at the moment:
SUSPICIOUS SELLING resumed this Friday, with the equivalent of 17 tons sold on the New York Comex in two bursts in the morning, according to market sources. And the declines continued after the settlement of futures trading in the early afternoon as the SPDR Gold Trust ETF slumped a total of 2.25% on the day, to close at 131.07, below the April 15 close of 131.31.
I have no idea of the intricacies of the suspicions and in fact I have no interest in them other than it is an interesting sideline story. What is important is that the SPDR ETF is below the recent low – implying there might be some more liquidation coming – and that gold is just $40 above the recent low of $1319 a break of which (my actual level is $1300) might trigger more liquidation.
For the Aussie the forecasts keep getting worse with Goldies out at the end of last week downgrading their target level for the Aussie to 0.90 against the US dollar. That is certainly possible but what I would highlight is that the Aussie has some significant support in the 0.94 region that it would need to break through before it heads toward 0.90.
Looking at the daily chart of the AUDUSD above there is little doubt that the Aussie is overdone to the downside at the moment but only as bad as the move to 0.9570 last June and not as aggressively oversold as when it hit around 0.94 in October 2011 or around 0.80 in May 2010. So I would still caution about trying to catch a falling knife and note the market is probably more like 2010 and less like 2011 and 2012 in terms over overall sentiment toward the Aussie dollar.
0.94 is the level to watch and selling rallies is probably going to be favoured by the market now.
USDJPY traded higher again as well to 103.18 but is off at 1.0282 this morning. We are expecting a reaction from USDJPY lower from this resistance zone but it is elusive at the moment.
Holidays in Switzerland, Germany and France for Whit day.
In Japan this morning we get the Leading and Coincident Economic indices before Italian Industrial orders and sales and the Chicago Fed index tonight in the US
Twitter: Greg McKenna