Macro Morning: Aussie dollar tanks

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Friday was a huge reversal of fortune for the Aussie dollar after the widely reported comments from the Chinese Finance Minister which suggest that growth is going to be lower in the second half of the year. While the debate seems to be raging about whether or not he has downgraded policy I think that that argument misses the point entirely.

China is slowing, China has been slowing and Chinese data has been undershooting expectations for ages now as you can see in the chart below which is the Citibank Economic surprise index which stands at -51.8 which is the lowest level since June last year.

Citi Eco Surprise - China

Obviously Chinese GDP to be released today is a key highlight for global markets and the Aussie dollar. The market is expecting 7.5% YoY but an undershoot is clearly possible because while I strongly believe a slow down is being instigated at the highest levels of the Chinese Government in order to get China toward something more sustainable and productive the reality is that Chinese Finance Minister Lou Jiwei may just have been warning us.

I tried to buy the Aussie for the first time in ages on Friday, of course every time I close out a short I am buying Aussie but on this instance I went long first at 0.9245 ahead of a nice little hourly uptrend line which you can see in the 4 hour line graph below:.

aud, audusd, australian dollar, australian dollar price quote, audusd 4 hour saturday

So I went long and then the Aussie ran up 0.9277, back into the sixties and then briefly into the eighties before coming back down into the sixties where I exited because I didn’t like the price action and thought there was a retest of the line, maybe break, in the offing (based on my trading protocols). And so it was that the Aussie broke the line aided and abetted by a renewed focus on China and its growth rate.

This little break of an hourly line and comments from the Chinese was enough to knock the Aussie for six across the board and it made a new low for this run below 90 cents at 0.8997 before rebounding a little to close around 0.9050 and it sits this morning at 0.9075.

On Friday I said that the Aussie had to break 0.9330 or I’d just trade the Box, that remains the case but the focus is now the downside and my long held target of 0.8916. Only if that breaks will I get super bearish short term.

Longer term I believe the Aussie is going to 81 cents.

On other FX markets the USD was a little stronger but euro, pound and yen came back  from early weakness.

Expectations are more important than reality in markets, that is what that CITI eco surprise index chart is all about. It is the Keynesian beauty parade in all its real time glory so while I worry that earnings are going to be weak and have weakened a lot over the past 6 months that doesn’t matter because so much earnings guidance has been given and thus all day traders and CNBC and the like care about is the “beat”.

If the earnings results we are going to see this week had come as a shock the market would have fallen off a cliff but they won’t come as a shock and some may even beat expectations and so their stock price might rise . It is the dance of expectation management corporate managers across the world do each quarter, half and full year.

So with 70 earnings results out this week there is a strong chance that the rally of last week is further built upon but a break and hold above 1686 is needed to kick the S&P 500 on further – I won’t be playing though, not from the long side.

I am not going to fall into the trap of being eternally bearish on stocks I am just not going to participate in move higher at an index level based on fundamental grounds.  But individually for stock pickers this US economic recovery is a boon for individual stocks and sectors like the banks as we saw Friday.

Anyway, at the close the Dow was up 0.02% at 15464 but I’m guessing that Boeing might bounce back tonight after it was confirmed that the Ethiopian Airlines fire was not caused by the battery’s which recently plagued the Dreamliner. The performance of the banks helped the S&P push to a new closing high at 1680 up 0.30% and the Nasdaq closed at 3600 +0.61%.

But having said I don’t want to fall into the bear case can I bring your eye back to Europe and the problems of Portugal. As you can see in this chart the 10 year bond rose sharply last week and indeed rose 61 basis points on Friday night to 7.51%.

PoRTUGUESE GOVERNMENT BONDS 10YR NOTE PORTUGAL PL Chart - GSPT10YR - Bloomberg

Europe remains a basket case with Chancellor Merkel more interested in spying and internet legislation than actually and actively moving after all these years to actually try to heal the European Sovereign Debt and Growth crisis. In the last few week’s we have seen a continuation in the economic deterioration of Europe’s dominant economy while political and economic problems continue across the EU.

The pot is on a simmer not the boil but it is worth keeping a weather eye on.

At the close the FTSE was marginally higher at +0.02%, the DAX rallied 0.66% but the CAC, FTSE MIB in Milan and IBEX 35 in MAdrid were all lower dropping 0.36%, 1.57% and 2.31% respectively.

On commodity markets gold looks like the best bet for a continued rally it it can get above $1303 which I see as huge resistance but if it breaks, well then off we go. Crude was up 1% again to $106.25, copper fell 0.41% to $3.17 lb while corn, wheat and soybeans all fell down 2.13%, 0.55% and 2.37% respectively.

Data

Chinese GDP and US retail sales? You take your pick on what is the most important today but they are both market moving potentially and they make Australia motor vehicle sales pale into insignificance. Empire State manufacturing is also out in the US.

Twitter: Greg McKenna

 

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