Fed Chairman Bernanke is the clear loser in the overnight rally. You might think it strange that I say that but with the S&P making a new all time closing high after the Chairman was seen as being “dovish” rather than his recent “hawkishness” it is clear that his nuanced message is not getting through the one sound bite rhetoric and rationale of the financial newswires and the market sharp-shooters.
I will obviously exclude some out there like Sophia at MNI here in Australia and Greg Robb at MarketWatch but for the most part the Chairman’s nuanced message is being lost in translation. Personally I think he and his colleagues have been clear about what they intend to do. They are going to taper sometime soon but they are going to leave rates low for an extended period of time until they are comfortable rates can move higher from the 0-0.25% range for the Fed Funds rate.
I think the best characterisation of what the Fed Chairman is trying to achieve has come from the aforementioned Mr Robb in an article on MarketWatch this morning where he portrays Bernanke as the exiled Corinthian King Sisyphus who was condemned to roll a rock up a hill only to see it roll back down again. Robb asks if Bernanke has set himself a similar task and says:
Bernanke is trying mightily to separate any decision on tapering from expectations about the path of the federal funds rate.
But markets continue not to make this distinction.
I agree 100% that this is what is going on and I further believe that the more the Fed seeks to make this nuanced although obvious distinction the more certain I become that the taper is coming. Remember he and his other colleagues have said it’s not their fault if market misinterpret their message recently.
But for the moment markets are bidding stocks higher and pushing the US dollar lower.
Overnight stocks in the US continued the rally that started pretty much as Bernanke started talking about 24 hours ago and the message that was received was that Helicopter Ben was ovish (now I don’t agree with that – more below) so the S&P 500 set a new closing high of 1675 up 22 points or 1.35%, the Dow rose 1.11% and the Nasdaq was up 1.63%. US 10 years rallied closing at 2.57% down 6 basis points.
In the US Jobless Claims unexpectedly rose by 20,000 to 360,000 but this fit with the market narrative that Bernanke put in play yesterday morning that rest on the employment and its outlook so as such it did not hurt or dent the stock markets move.
European bourses were also higher but less so than their US counterparts.
On commodity markets the weaker US dollar saw gold rally to $1284 oz up $32, silver rose 4.14% to $20.06 and copper was 2.66% higher at $3.18 lb. Crude is doing its own thing at present and withdrew from resistance falling 1.8% to $104.60.
I want to focus on FX a bit this morning though, particularly the Aussie dollar because I think it important that readers understand the rhetoric I expressed above mustn’t get in the way of trading. I am here after all to make money amidst this chaos.
So let’s look at some charts for levels I’ll focus on the Aussie for today given time constraints and potential for the biggest break of recent trends.
I have been bearish for some time on the Aussie and I have had a target of 0.8916 as an extension from the previous break. This remains in place for the moment but as you can see in the chart above, which is the AUD daily, the Aussie looks at worst like it is consolidating in this lower range and at best it could actually have a sustainable base from which to launch a big move higher above 96 cents at a minimum.
Clearly this doesn’t fit with my rhetoric, it doesn’t fit with the employment data we saw yesterday for Australia, it doesn’t fit with the NAB Business Survey or the continued diminution with the mining boom nor with the slowing in China. But it remains possible because not all of the Aussie sell off has been Australia specific. Some part of it has been about the US dollar (1 of my 5 primary drivers) and if that is going to change then the chances of this being a base have increased.
How will we know?
I tweeted this chart (or the version of it) yesterday afternoon when the Aussie was just above 0.9300 and said that the Aussie was either 30 pips from a big and unequivocal break higher or at the top of the range. In the end I went short at 0.9294 and rode it down for 50+ pips (jumped off too soon to cook the family dinner).
So when you put the two charts above together you can see on the dailies the chances of a move higher have risen and when we use the 4 hours charts we see a clear Darvasian box. A break of 0.9330 is the signal that a move higher has begun. In the interim I’ll just trade the lower box.
It is a similar story for the yen and sterling to name just a few which speaks of a potential bigger USD retracement within what I strongly believe is a big and enduring trend toward more USD rallies in the months ahead. The key levels to confirm or deny the chances of a move higher in all of these currencies against the USD are the highs of yesterday or overnight.
Similarly gold has a resistance zone in the $1300-20 region but a break would also be decisive.
All the best and good trading
Twitter: Greg McKenna