Macro Morning: Long live the King

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There seem to be three trends emerging in markets at the moment. The first is the reemergence of US dollar strength, the second is the upward pressure on yields in the US and Japan for almost the opposite reasons and third is the growing line up of notable names who want to dis the Aussie dollar.

This morning John Taylor of FX Concepts, which is the worlds biggest FX manager, has said that the Aussie dollar is a bubble. This is the third notable name after Soros and Druckenmiller last week to have come out on the sell side declaring the Aussie a dead duck. Now anyone who reads my stuff knows that on the basis of the fundamentals and the techincals I formed the view a little while back that the Aussie was vulnerable. I went long on the break of 1.05, turned it for a small profit when the break proved false and have been following the deteriorating outlook and price action pretty much ever since.

Equally we have had a target of 0.9857 for the past few days but it is getting to the point and as we get closer to this level after already falling almost 4 cents from last week’s highs where we are thinking of going flat Aussie for a reaction back higher. Sure we have heard in the market that the offers have been dragged down for Aussie selling which of itself is an important tell on the psyche of the market and we recognise that trying to catch a falling knife is a dumb idea but from where I sit the Aussie is entering the zone where my lifestyle position might be lifted for a little bit.

The NAB survey yesterday was another indication of impending headwinds for the Australian economy and the Budget tonight is hardly likely to show a picture of health in either the outlook or in the revenue and fiscal position but for the moment I’ll be looking for levels to square up my short AUDUSD.

To me when I look at the daily version of the weekly chart below it seems that for the moment the Aussie is searching for bottom and sits at around 0.9950 today and we still think that the 0.9857 level will offer material support in the short term so we are approaching a zone where support might finally emerge.

aud, audusd, australian dollar, auaud, audusd, australian dollar, au

As you can see in the chart above the AUDUSD is almost there now and the short term time frames of the dailies and 4 hour charts are getting into heavily oversold territory for the moment  so we might put a take profit into the market soon as noted above. Given the above and noting the article by Vincent Cignarella of the Wall Street Journal yesterday we might actually switch our short from AUDUSD to AUDJPY.

JGB's

Turning to the trend in bond rates there was a big move in JGB’s yesterday with the 10 year up 9 points which doesn’t sound much but was something like a 12% sell off. Low yields on long bonds equal huge tick value and the longs would have taken a huge wack to their P&L. As you can see in the chart from Bloomberg yesterday’s move broke back above a trend line which had been a previous floor but there remains  2 year overhead resistance in the next few points and a five year trend line comes in around 1%. If the point of BoJ QE is to raise inflation expectations then bonds by definition should also rise but we’d expect the BoJ to see this as unhelpful and enter the market sometime soon to drive down yields or at least cap them under 1%.

Rates in the US were also a little higher after the Hilsenrath article we talked about yesterday and the stronger than expected retail sales. Realistically a withdrawal of Fed stimulus and buying does put natural upward pressure on rates so there is a rebalancing going on which will see rates find a level but that level is likely to be higher and as such will reinforce the USD’s support.

Which as noted reinforces the US dollar’s support and from where we sit this is a huge story as it reinforces the notion that currencies such as the Aussie and a lesser extent the Kiwi were safe harbours for US dollar bloc investments during the past few years and are now being shunned as the US dollar benefits from a stronger or at least improving economy.  Indeed GBP has come under pressure once again and this on is increasingly looking like it is going to have a round trip trade back to the recent lows. Is GBP dollar bloc? I’ve always thought it was at the margin, perhaps dollar bloc should really be called Commonwealth as we’d put the AUD, CAD, ZAR, NZD and GBP all in a similar basket sometimes. Either way a move toward 1.5150 from the current 1.5269 looks in the offing.

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Turning to stocks, they went nowhere overnight with the DAX unable to push on from its new all time high last week and the US markets unable to capitalise on the better then expect retail sales data for April which showed a rise of 0.1% versus last month’s 0.5% fall and this months 0.3% fall which was expected.

At the close the Dow was down 0.18%, the S&P largely unchanged up 0.02% and the Nasdaq 0.07% higher. In Europe the DAX was flat, the FTSE rose 0.11%, the CAC fell 0.22%, Milan fell 0.65% and Spanish stocks were weighed down by financials falling 1.01%.

On commodity markets, gold too looks like a round trip after failing in the $1475/85 resistance zone we identified on April 22 when we said:

this looks more like a reaction to an acutely oversold market for the moment than to anything looking like a recommencement of the Gold uptrend. It looks like there will be better long term buying opportunities ahead and we would be selling on rallies into the $1475/$1515 zone.

Crude was off as well falling 1.21% to $94.88 which reinforces the US dollar nature of these moves and clearly identifies the emerging US strength as the trend to watch.

Data 

Retail sales in New Zealand this morning and then CPI’s across Europe and IP for the Eurozone and Import Export Prices in the US.

Twitter: Greg McKenna