Macro Morning: Upside down world

morning1211

Enid Blyton would be proud. The world is truly upside down where bad news is good news and good news bad. It makes for an interesting week given last’s data was just the beginning and we finish off with the globe’s most important data release – non farm payrolls – on Friday.

Looking at last night, however, the manufacturing PMI in the US, the ISM, was weaker than expected which drove expectations that the Fed won’t be able to reduce its bond buying anytime soon, rescuing the stock market from its lows even though there were two Fed Governors on the hustings saying that the reduction could come as soon as the next two months.

It really is crazy stuff and shows both the difficulty the Fed faces in withdrawing the stimulus from the US economy but equally why the Fed has to communicate to markets that it will have no choice but at some point to withdraw exactly the stimulus drug that is driving the topsy turvy world markets now inhabit.

In Europe the PMI releases showed that manufacturing was still struggling in the contraction zone but less so than the previous month which I suppose is good news. But for the unemployed in Europe it needs to continue to improve steadily.

So the upshot of this combination of data was that US stocks closed higher but the US dollar fell under the weight of a weaker economy.

At the close stocks in the US made a decent comeback with the S&P trading down to a low of 1,623 closing at 1,640 up 9 points or +0.57%. The Dow finished up 138 points or 0.92% and the Nasdaq rose 0.26%.

In Europe they seem to have missed the rally in the US late in the day with the FTSE off 0.88%, Dax down 0.75%, CAC off 0.70% while in Italy and Spain stocks fell 0.91% and 0.44% respectively.

The USD as noted was under pressure with even commodities such as Nymex crude and copper which should have fallen on weak data actually rising due to the USD effect. The big news was that both the Aussie and the yen hit the targets I have had for the last few days.

The Aussie traded up to a high of  of 0.9792 more than 2 cents higher than the low yesterday morning of 0.9587. Of course the Aussie rally was expected as I targeted a move to 0.9780 last week after the AUD found support at 0.9525 but coming on the day that the ANZ Job Ad’s fell 2.4%, when retail sales grew at just 0.2% last month and when the AiG performance of manufacturing printed better but still appallingly at just 43.80 many fundamentalists might find it strange that the Aussie rallied at all.

The key here and why we always stress a combination of drivers as determinants for traders and investors is that the rally is not about Australian fundamentals it is about AUD market positioning (which hit an extreme as you can see in CFTC data released Friday night). It’s about technicals (the market got oversold and suggested a normal bounce of up to 4 cents), and it’s about the US dollar which was weaker across the board and traded down and through the 99.90 level in USDJPY we highlighted:

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

Interestingly, the daily charts suggests this recovery isn’t over yet. The rally is expected to head into the 0.9780-0.9870 region. So we’ll see where it goes in the next day or so but it has satisfied our minimum retracement level.

Watch out for the RBA today as I note that over the past couple of years they often move twice in close order and then step away for a while so this is not a zero probability of a cut day, maybe 20-30% chance. My view, they should cut today. 

In Tokyo yesterday the Nikkei was once again poleaxed and has fallen down and through important support which signaled the fall of USDJPY down and through support at 99.90. There has been a recovery in futures trade overnight as you can see in the chart below but if USDJPY continues to fall then the Nikkei will remain under pressure.

nikkei 225 daily, nky, (nky), nikkei chart daily

While talking about the Nikkei it is worth mentioning the yen and its recent strength against the US dollar. While the reality is that these daily notes are in many ways the tabloids of market commentary and as such tomorrow’s electronic fish wrappers, for me the articulation of my thoughts in this note form a core part of my process. So regular readers will recall that i argued that 102.70-103.50 was where the USDJPY would pull up due to a plethora of overhead technical resistance and we then looked for a test and break of 99.90. This has occurred and support is now 98.98 a break of which would open a very deep retracement. But this is the up trend line from the start of the move so we respect it unless or until it breaks.

jpy, usdjpy, jpy chart daily

Elsewhere the euro is trying to make my H&S call look silly and in fact it almost does now but the key was and is a break down through 1.2840 and or 1.2740 to confirm the break down. As it stands at the moment thought the Euro is threatening to break up and out of a descending wedge.

Data

RBA the key for Australian and Aussie dollar traders – 2.30 pm Sydney/Melbourne/Brisbane time.

Otherwise fairly quiet.

Twitter: Greg McKenna

Comments

  1. Ah – and the moral hazard becomes so obvious now. However, by now it has become so entrenched it will be harder to undo than actually the bad patch they were trying to protect against.

    Hurray for QEInfinity.

  2. So we’ll see where it goes in the next day or so but it has satisfied our minimum retracement level.

    Mad Adam says its all about the US dollar and the AUD is heading back above parity. Is it time to buy some of this before the next leg down?
    https://www.google.com/finance?q=ASX:USD

    • thomickersMEMBER

      nah keep reloading usds. the current value of the AUD is making everyone’s job a little bit redundant.