Macro Morning: Moody’s hits the US dollar

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We really should do something about having the ratings agencies as the arbiters of what is good and right after the performance they put in prior to the GFC, but somehow they remain at the centre of global finance. Last night Moody’s warned the US that it faced a downgrade to its Triple A rating if a budget deal is not cut.

I say big deal and let them cut so people can start to make up their own minds about what is a good and a bad risk and take responsibility for it rather than a rote reliance on AAA, AA or BBB. Indeed in Australia some of the more sound ADI’s are rated lower in the BBB+ region because they are not big enough to save yet other larger institutions with less strong balance sheets, less actual member deposits and less capital get uplifted to a higher rating because they are viewed as systemically important.

That is a pyramid upside down when the strong are rated lower than others because if the others get weak they will get government assistance.

Anyway enough of my rant for the morning but it seems that Moodys’ action hit the US dollar a little overnight which took pressure off the Aussie dollar, Japanese yen, Euro, GBP and CAD but crucially reversed the acute pressure that silver and to a lesser extent gold were under yesterday morning.

On stocks the Dow fell 0.13%, the Nasdaq dropped 0.08% (sounds hyperbolic when you write it like that) and the S&P fell 0.09%. In Europe as noted the FTSE rose 0.49% to 6,756, the DAX was 0.69% higher and the CAC was 0.54% higher. In Milan and Madrid stocks were under pressure falling 0.55% and 0.79% respectively.

The FTSE has now eclipsed the high of 2007 and is almost back to the 1999 high. Buy and hold investors will be cheering their good fortune – 14 years to make back a high. Gee Whiz.

Anyway, in FX land, the CFTC data out Friday was interesting in that it showed the market now net short the Aussie and yen positioning was getting to an extreme short given the past 12 months positioning.

I noted in my CFTC data and charts yesterday that:

New highs in USDJPY still didn’t manage to get the net short position back to the highs of the last 6 and 12 months – which might imply a lack of follow through and a very tired rally in USDJPY or tired Yen sell off.

That makes sense given all of the overhead resistance in this 102.70/1.0350 region we have targeted and been warning about for so long. It is a stretch given the re-emergence of USD strength to say the Yen is going to rally but the positioning remains a warning.

Not long after I decided to go short USDJPY with a bit of leverage on this basis and on the techincal outlook. It helped that  the comments from Economic Minister Amari were resonating around the market as well and as dangerous as being short USDJPY is in this long and very strong trend I have a clear stop in place so if I get stopped out it was just a trade that didn’t work out.

jpy, usdjpy, yen, dollar yen, dollar yen quote, daily chart

Clearly this is a long and persistent trend. Anyone trying to sell US dollars during this trend has been hit hard if they weren’t nimble. The key to a deeper sell off, and also support, looks to be the 101.60/70 initially and then if this gives way 100.75/85 with very big support at 99.93.

Dollar/yen has been higher for 8 months in a row and has rallied from around 79.50 when it started to a high on Friday night above 103. That is a very big and strong trend and we think Amari is right for now. Equally with the Japanese Government upgrading its economic outlook which is being mirrored in improving economic data relative to expectations and with all the overhead resistance perhaps it is time for USD to consolidate for a while – either in time or price.

On other FX markets the US dollar reversal yesterday helped lift the Aussie back up and above 0.98 hitting a high or 0.9827 before pulling back to 0.9809 at the moment. After falling for 9 out of 10 days in a row some sort of consolidation is expected and is not inconsistent with an overall down trendIndeed using my usual systemised but discretionary approach it is not beyond the realms of reason that AUDUSD heads all the way back to the 0.9970/90 zone which is where our daily fast moving average sits.

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

Clearly the Aussie has room for a rally as much because the punditry is now all universally out and about declaring it dead and on the way to 0.90 as you can see in this article in the Financial Times. I guess as one of the first to both call and explain the change in Aussie sentiment and prospects and can be cycnical about the new found love for hating the Aussie being evidenced all over the place but the key is any rallies are counter trend and opportunistic within an overall move to test support at 0.9400 sometime.

Euro and GBP also rallied as did the CAD so we know that last nights move was a US dollar move. Even gold and particularly silver managed to rally after early weakness. So the question is whether or not this is an early weak lack of data one day wonder or something more durable. We’d argue there is room for a reversal in many markets within an overall trend toward a stronger US dollar in time.

silver, xagusd, xag hourly chart

On commodity markets as noted the weaker US dollar drove markets with silver reversing off the acute early Asian sell off yesterday to close something like 10% off its low at $22.67. Gold also reversed off its weaker early morning to close up $19 at $1386. The volatility in the precious markets and the price action on Friday and then yesterday morning certainly suggest that the Barron’s conspiracy theory we talked about yesterday has some legs.

Elsewhere Nymex crude was 0.65% higher, copper rose 1.08%, Soybeans rose 1.04%, Wheat up 0.99% and Corn fell 0.57%.

DATA

RBA Minutes are out today along with the Australian leading indicator of economic growth. PPI in Germany tonight and a raft of inflation data in the UK. Redbook is out in the US tonight.

Twitter: Greg McKenna

Comments

  1. “Such a huge seller in an illiquid market is either manipulation or desperation (margin).” https://twitter.com/goldseek/status/336261445455073281

    Seems to be a lot of large sales recently in the PM sector during quiet hours. Short term manipulation (assuming it is occurring) will have little bearing on the longer term trends in the metal. It simply provides opportunity for those with expectation for higher prices to add to their positions (including the heavy physical buyers in China / India and Eastern Central Banks).