Originally published by AxiTrader
Market Summary (7.44 am)
Someone has finally done it and had the gumption to break ranks in the polite world of central banking and governmental relations and call out the Trump Administration, and Treasury Secretary Mnuchin, for their approach to the dollar.
Overnight Dutch central banker and ECB governing council member Ewald Nowotny said the US is deliberately keeping the dollar low. Gasp’s of breath were so strong the flags in both Brussels and Washington were ruffled.
I’ve got more below, but the key is the US dollars recovery has continued to gain pace with the euro, Aussie, and kiwi all losing around 1% or more to now sit at 1.2258, 0.7820, and 0.7218 respectively (the kiwi dipped a little further after the RBNZ sat pat). Sterling is down 0.5% at 1.3878 and the Canadian dollar is off 0.6% with USD/CAD up at 1.2560. Who said volatility hadn’t infected forex markets? Oh, me :S
On other markets Asia largely missed the memo on stock market bounce back yesterday, but Europe was stronger overnight. The DAX, CAC, and FTSE were all up between 1.6% and 2%. And US stocks are higher as well with what would usually be considered decent gains but which seem fairly muted given the past few days volatility. The S&P 500 is up 0.38%, the Dow 0.54%, while the Nasdaq is in the red to the tune of a third of a percent.
Volatility, at least as measured by the VIX, is lower again at 23 down from 30 around this time yesterday morning.
So after a disappointing day yesterday where the ASX only regained half of the previous day’s losses with a 0.75% lift to close at 5,876, SPI traders have another 39 points overnight. So it should, hopefully, be another positive day. Depending of course what happens between now and the close of US markets. And the impact of thee fall in commodity prices.
Indeed, on commodities, it’s been ugly. Gold is now down at $1315 as I lament my caution in exiting my short when stocks got funky. Bugger, as they say in that car ad. Oil has also fallen out of bed after another build in inventories. WTI is now down 2.5% and Brent is 2% lower at $61.80 and $65.53 respectively. Copper has also fallen heavily and is down at $3.10, off 3%. US dollar folks.
Worth noting US bonds are higher again folks with the 2’s at 2.14%, 10’s at 2.85% and the curve at 71. The preconditions for this week’s stocks funk remain intact.
On the day ahead we have the RBNZ meeting at 7am and then its trade from China in ouor session and trade from Germany tonight. The big one of course though is the BoE monetary policy decision, statement, minutes, and inflation report. We also have a few Fed speakers on the hustings.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Ewald Nowotny’s comment on the US and its forex policy is likely to be denied and decried by EU and ECB officials as non-representative. But in saying what he did overnight and calling out the US Administration for its clear mercantilist tendencies he might have broken the banks of restraint that many policy makers across the globe have felt. Before I go on though here is the relevant excerpt.
- Nowotny said in an interview with the Wiener Zeitung conducted earlier this month – that’s after the US President and Treasury Secretary had walked back a little from Mnuchin’s cheering of a weak dollar – that “what astonishes us are two other things .On the one hand, that the US Treasury wants to deliberately push the US dollar and keep it low, and on the other hand, that in the environment of Donald Trump, where there are a number of reasonable people, nobody has made a positive impact on the President and his politics”. So both a direct criticism of the President and his policies.
- This is important in the context of central bank policy and the chances of the re-emergence of divergence as a narrative. I say that because Nowotny would be expected to be a voice of restraint around the ECB governing council table about any policy change which strengthens the euro and hurts the EU economy or EU business. He’s likely to find some friends among his colleagues in that respect which is remarkable given I’d usually characterise Nowotny as on the hawkish side of the ledger.
- The problem, of course, is that the fight back against the Trump Administration’s mercantilist tendencies must be managed carefully lest it turn into the very beggar-thy-neighbor policies which global policymakers have so successfully avoid in the post-crisis world of the last decade. Behaviourally though when you have an iconoclast in charge of the world’s biggest economy and running policies clearly to that economies own benefit other nations will suffer and political pressures will mount internally for a response. I fully understand US citizens' desire to redress some of the imbalance globalisation has wrought on a large swathe of the population. And as such I fully understand the Administration’s approach. But the danger is that if pushed too hard or too far we could end up with other nations being forced to respond.
- Today’s impact has been in forex. But with nationalism on the rise this is a dangerous time for the established order and thus for the anchors on which traders and investors views on cross market relationships are formed. It’s a long game. With the global economy looking solid into 2018 and 2019 the tide will lift all boats. But I’ve spent a lot of time on it this morning because I believe it is something to watch as it will impact asset markets if relations deteriorate into responses.
- Speaking of which both China and the EU are seeking compensation from the US for the recent solar tariffs. And Reuters has an interesting story with the following headline “As US rattles sabre on trade, Asia bites its tongue on soft dollar”. But for how long?
- Bloomberg reports this morning the worlds largest ETF suffered record outflows this week. “The global market maelstrom spurred money managers to yank a record $17.4 billion from the mighty SPDR S&P 500 ETF (NYSE:SPY) over the past four trading sessions. The $8 billion removed on Tuesday alone was the third-largest daily withdrawal in the post-crisis era. The last time redemptions were close to matching this frenetic pace? In late 2007, when cracks in US equities began to show before the global financial crisis unfolded” the report said.
- And while we are talking about this week’s funky market another Bloomy story says that an inventor of the VIX said he doesn’t know why the products that blew up even exist. Devesh Shah said “everyone knew this was a huge problem. Everyone knows that Inverse VIX is going to go to zero at some point…at the end of the day cost people a lot of money”. You can read the full story here. If I can editorialise for just a sec. Shah is right. The warning given by old blokes like me are shrugged off as irrelevant by a new wave of “smart” investors. But why have you read ‘picking pennies up in front of a steam roller” so many times and in so many places in the past few days? Because it was the easily accessible reality of what these products were doing and old blokes like me had seen it all before. HISTORY FOLKS, IT”S IMPORTANT.
- Which brings me to the crypto space. I really like the way that Goldman Sachs (NYSE:GS) has framed the argument about cryptos and I agree wholeheartedly. CNBC reports that Goldies head of global investment research says MOST cryptos will crash to zero. I’ve highlighted MOST because he is dead right in his logic. Here’s what he said (my bolding) “People seem to be trading cryptocurrencies as though they're all going to survive, or at least maintain their value. The high correlation between the different cryptocurrencies worries me. Contrary to what one would expect in a rational market, new currencies don't seem to reduce the value of old currencies; they all seem to move as a single asset class…But if you believe this is a 'few-winners take-most' situation, then the potential for retirement depreciation should be taken into account. And because of the lack of intrinsic value, the currencies that don't survive will most likely trade to zero." Just like with the VIX ETF’s the laws of the market have not been suspended for cryptos – just look at a chart of any off them. Technical have worked really well as the Bitcoin bounce of this week’s low on thee 200 day moving average shows. It’s back at $8,000 this morning in a cracking percentage recovery from the low.
Australia
- Well then, this move higher in the ASX and SPI 200 is not a recovery from this week’s carnage that fills me with great optimism. I say that with specific reference to the price action on the market yesterday which utterly undershot the expectations of SPI traders overnight achieving around half the expected gain. And I say that when I look at the chart of the moves on the SPI 200. 5,875/5,885 has clearly emerged as the level above which this market has to move to change what is still a very uncertain outlook.
- Turning to the Aussie dollar now and it’s clear the 61.8% retracement of the rally from 75 to 81 cents and 200 day moving average around 0.7740/50 is likely to be tested soon. And if that level breaks the bears will fairly roar as the positive feedback loop of weaker US dollar and stronger commodities has reversed course putting the Aussie back under intense pressure this morning. I’m short and have been since above 80 cents last week. I’ve taken profit on two-thirds of my position as its fallen (again I know I’m too cautious) and have the 0.7740 level penciled in as the real next test. 0.7800/10 is very important as well given it was where the assault on 81 cents was launched from in early January. The low of 0.7816 overnight suggests traders are eyeing that support.
- The key of course is that this is about the US dollar. But so too was the rally. And if traders, investors, and strategists across the globe get the sense that the US dollar has actually turned expect the calls for big falls in the Aussie toward 70 cents to grow louder. I’m not that bearish. But as a trading strategist, I follow the price action. Up recently and down at the moment. Overall though the tensions between a stronger US dollar and a very positive global growth backdrop should see the Aussie find support if it does head back into the mid 70 cent region once more.
Forex
- It’s increasingly looking like the US dollar has put in the bottom I’ve been suggesting it was trying to do. But it is not out of the woods yet with the 91 level in US Dollar Index terms for me the key. It’s both a previous spike low and the 38.2% retracement level (90.98 to be exact) of this last leg lower. So that is the level to watch in the days ahead. The DXY is at 90.30 as I write.
- And the corollary of that is the 1.2223 level for EUR/USD. That’s the 38.2% retracement level of the rally from the low 1.17 region. You can see it here in the weekly chart of the euro.
- And of course there is also a correlation for forex markets more broadly to this reversal in the US dollar. So far all I can say is the relentless move lower in the US dollar between November and early February saw correlations of the majors head toward 1. Likewise the correlations between the euro and commodities like gold and oil also rose into the high 80’s and low 90’s on a rolling 35 day basis. So, if the euro is turning, and if there is a chance that pushback from the BoJ, ECB, and other central banks to US dollar strength and the resurgence in the chance the Fed will need to accelerate its path of rate hikes then policy divergence can become a theme again. That means the US dollar can push substantially higher putting down on other currencies. It’s too early to declare that as the most likely outcome just yet though. 91 in DXY terms and 1.2222 in euro have to be bested by the US dollar first.
Commodities
- The EIA reported a build of 1.9 million barrels in US crude inventories last week. That was lower than the 3.2 million barrels expected. But crude oil fell heavily anyway because the build in crude was despite increased refinery runs. That set a bearish tone and a stronger US dollar wouldn’t have helped the bulls case either. The washup is that WTI is now down 2.43% at $61.45 while Brent is down 1.87% at $65.66.
- I’ve been concentrating on Brent lately with my charts and it is worth noting the low last night at $65.14 was only just above the last line of support before a fall to the $61.00/50 region I’ve been suggesting comes to the fore. A break, or hold, of $65.00 is the key. Here’s the chart.
- Gold looks headed toward $1300 now that the 38.2% retracement level at $1316 has given way. Again, it has had a high correlation with US dollar moves so if this recovery in global stocks can continue then gold is likely to remain under pressure.
Have a great day's trading.