Rightyo, so yesterday was an interesting day. A day where the Japanese push toward monetary accommodation and a weaker yen was reinforced by the G20 and the Upper House Japanese election but the yen gained. I’m not actually sure it had anything to do with the yen. It looks more like a US dollar move with gold roaring higher, euro trying to break out the Aussie approaching the top of its box and copper also higher.
Could it be that if the market thinks the Fed is not going to Taper, or at least understands the difference between Taper and higher interest rates, that we are back in the goldilocks world of ok growth, low rates free money and a weaker US dollar?
I thought I’d have a look at the euro in particular this morning. Surprisingly there is a good fundamental reason it has rallied and indeed it could go further still although I am waiting for a level to sell it and by inference Aussie, yen but perhaps not sterling which I still like very much against the euro.
The chart above is of the difference between the EU and USA Citibank Economic Surprise Index and the EUR rate. As you can see the correlation is not perfect but it is indicative for the direction of the pair.
I believe that at its essence FX and markets generally are about trading like John Maynard Keynes. You may be aghast at that but his insight below is brilliant:
“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” (Keynes, General Theory of Employment Interest and Money, 1936).
Whether you are a fundamentalist, a predictive technical trader or a trend follower this is at the heart of what you are doing.
So the causality runs in that as the data prints better or worse than the market expected in each jurisdiction it impacts on the relative view of the FX rate between Europe and the United States. Consequently US data has been relatively weaker than data in Europe which really just means that the recovery isn’t as strong as some (me) thought it would be and Europe is not as bad as many feared (yet). It’s the same with earnings season and massaging expectations for company reports in the stock market.
So, there we have it. The euro’s rally is rational. But will it last?
The easy answer is no. US expectations will be recalibrated to a lower expected path, expectations in Europe will adjust and so the “expectations gap” will change or close. In the meantime, with euro having made a marginal new high some may think it will break the uptrend line in what might be a huge 4 hour pennant formation.
That horizontal line seems to be a pivot point for euro going back into 2011 (HT @entubao) so if we are wrong and it does get above then it could go for a run until expectations recalibrate. But I’m still a long term US doll bull.
On stock markets the S&P 500 is up +0.20% 1696. Another new high. The Dow barely moved but the Nasdaq was 0.35% higher. In Europe the FTSE and DAX were largely unchanged but the periphery rose with gains in Milan and Madrid.
On the economic front Existing Home Sales in the US were running at a slower pace than expected (-1.2% v +0.5%) which seemed to help subdue emotions about the taper and undermine the US dollar.
Commodities saw gold burst through for the biggest one day up move in some time and the precious metal sits at $1332 up $43 oz. Dr Copper was also higher up 1.25% showing that this is really a US dollar move.
Just look at this gold chart above – the break is a good one and a clear one and the target could be $100 bucks higher. I won’t miss the retracement if it comes to buy.
Today in Asia we’ll be watching the Singaporean CPI which will be interesting in the context of where their GDP has gone and then we get retail sales in Canada, Redbook in the US along with house prices and Richmond Fed manufacturing index and EU consumer confidence.
Twitter: Greg McKenna