Macro Morning: Australian dollar sell

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Given the choice was extreme volatility or mostly quiet trade in the lead up to the FOMC meeting later this week I’m guessing there are a huge number of traders who are happy that it was quiet market trade that prevailed in the end.

All except the Aussie dollar which had another wild night opening at 0.9550 trading up to 0.9640 for most of the Asian day and early Europe before tumbling out of bed and all the way back to yesterday’s open. It was and is interesting price action because even though positioning is at extreme levels based on the CFTC Commitment of Traders Report the buyers are still met with heavy selling every time the Aussie rallies. Or perhaps they are just optimists trying to buy the counter trend and don’t really have any conviction.

If  the big spec traders are as short as they have ever been the Aussie is vulnerable to a snap back and many twitterarti were commenting to that effect yesterday. Indeed I noted myself that the change of a rally to and through 97 is on the cards. But that is not the way I traded it. I traded the market in front of me yesterday and I went to bed short AUDUSD.

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I didn’t capture all of the move as I wasn’t expecting a move back to 0.9507 but rather into the 0.9550’s but as you can see in the chart above the AUD traded nicely from a technical perspective after breaking the hourly uptrend it ran to the 200 hour moving average before rallying. It really was a beautiful technical move and reinforces that my “system” works as well on hourly charts as it does on the Dailies, Weeklies and Monthly charts. That is why I say my process is time invariant. It doesn’t always work of course we all have trades that simply don’t work but it does set up high probability trades.

And it is a lesson in the difference between trading and rhetoric – there was every reason based on market positioning to think the rally from yesterday’s lows had further legs but like I suggested there are lots of sellers around and in the end I traded the market not the rhetoric and my account benefitted from it.

Please note for all the trading I am doing I am holding a core small short Aussie position and will do for the next little while.

On other FX markets it was fairly quiet for a change displaying the sort of volatility that we see in what we might call “normal” times which is of course welcome. The euro traded a 1.3316-1.3379 range to marginally continue its rally but it is looking a bit over extended. GBP likewise was fairly quiet up just 0.14% on the day at 1.5732 and it too looks like it might roll over if it doesn’t kick on this week while the yen had a negative day but the tractor beam of the 38.2% retracement level of the big rally seems to be keeping it anchored below 95. Only a break of 93.60/70 though opens up a deeper move and if anything support is expected near term.

Unless of course the Fed walks back from tapering and then all of the above is redundant.

Stocks were strangely positive given the stories about tapering in the Wall Street Journal and the FT. The WSJ article from Jon Hilsenrath is probably the most crucial given he has all the appearance of being the Fed mouthpiece and I saw the  Hilsenrath article yesterday morning Asian time just after it was released.  His key point was that the Fed isn’t going to be tapering this month but they are likely to continue with forecasts that suggests they will and he notes that even though most private forecasters reckon the Fed might be disappointed by the growth the metric that matters most to them, employment, is improving. He writes:

When the Fed launched its latest round of bond buying last September, it said it wanted to see substantial progress in the labor-market outlook before ending the program.

Back in September, the economists surveyed by the Journal were projecting monthly growth in jobs of 142,000 in the year ahead. In the latest survey, they projected 183,000. In other words, they have become more optimistic about job growth since the Fed’s program was launched. Meantime, their unemployment forecasts are coming down, another sign of improvement. Their forecast for the December 2014 unemployment rate was 7.1% last September and 6.7% in the latest survey. The rate was 7.6% in May.

That’s progress—and the kind that matters most to Fed officials now.

So I’m expecting talk of tapering, but no actual tapering and a focus on the improving labour market. But I am not sure how the market is going to take this message.

Last night stocks didn’t care, well they did because they finished off their highs but on balance stocks around the world did much better.

Asia kicked off the better mood with the Nikkei up 2.73%, the Hang Seng up 1.22% and the Sensex and Straits Times up 0.77% and 0.68% respectively. This helped Europe kick off nicely with the CAC and DAX up strongly at 1.55% and 1.08% respectively. The FTSE in London was up just 0.34% while its counterpart in Milan rose 0.25%. Spanish stocks rose 0.81%.

In the US stocks also ended higher on strong rises in the New York Empire Manufacturing index from -1.43 last to 7.84 in June and in the US home builder confidence index.

At the close the Dow was 0.73% higher, the Nasdaq rose 0.83% and the S&P finished at 1639 up 0.75%.

All boring on the commodity front with markets seemingly becalmed as we run up to the FOMC. This was one of two scenarios we might have seen and both come about because of a lack of players. Sometimes as people pull out of the market we see wild volatility, like the Aussie, while at others we see tighter ranges because the catalysts are lacking.

So at the close Nymex Crude was 0.02% higher at $97.87, Gold was -0.28% at $1383 and Dr Copper was -0.22%,

Data

The release of the RBA’s minutes will be important for the Aussie dollar and Australia interest rates. Chinese FDI is out while the UK has a raft of inflation data before the ZEW survey in Germany and the BoE inflation letter. In the US it’s CPI, housing starts, building permits and the Redbook index.

Twitter: Greg McKenna

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