Euro Surged As Mario Draghi Acknowledged EU And Global Growth

Originally published by AxiTrader

Market Summary

Jackson Hole has come and gone. Janet Yellen defended financial regulation and Mario Draghi tried to highlight there are still risks to the EU inflation outlook while acknowledging EU and global growth was on the up.

That was all the bulls need and the euro surged on Friday night to the highest level since January 2015. Traders grabbed the fact that Mario Draghi didn’t try to jawbone the single currency. That generalised US dollar weakness suggests to many that the period of consolidation of its fall that we saw in August may be over.

That fall lifted EUR/USD to 1.0946 as traders take the path of least resistance higher. The yen, pound, Aussie, Canadian dollar, kiwi – among others – have all gone along for the ride in varying degrees. Save for the pound however most are lagging the euro and the AUD/USD is at 0.7923 this morning.

Stocks were a little lower in Europe and mixed to a little higher in the US. The S&P 500 closed 0.16% higher at 2,443. The Dow Jones Industrial Average gained 0.14% and the Nasdaq 100 was off just 0.09%. The wash-up is that the ASX is expected to open 6 points higher if SPI traders are right.

On global bond markets, the rally remains intact with US 10's down at 2.17% while German 10's yield 0.38% - forex traders and bond traders aren’t talking to each other, clearly.

On commodity markets, a weaker US dollar helped gold higher while the dollar and Hurricane Harvey conspired to lift WTI prices close to 1% higher. Copper is still strong around $3.03 a pound.

It’s a slow start on the data front to what is a reasonably big week of data with US non-farms the highlight Friday.

Here's What I Picked Up (with a little more detail and a few charts)

International

• Janet Yellen’s speech on financial stability at Jackson Hole had no implications nor mentions of monetary policy. But it was a passionate defence of the increased supervision and stress test put in place after the financial crisis. There was also push back against the Trump administration’s claim – one echoed by putative Fed challenger White House economic adviser Gary Cohn – that the new rules had decreased the availability of credit for business. “The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth,” Yellen said. Pointedly she added “Already, for some, memories of this experience may be fading - memories of just how costly the financial crisis was”.

• Traders had cloth ears to the cautiousness in Mario Draghi’s address at Jackson Hole as they chose to focus on his recognition that growth has picked up and his lack of warning on either the risks the euro poses to the ECB’s inflation target or the growth outlook. I confess to completely missing that traders though Draghi might say something about the euro as a risk on Friday night.

• Draghi said “the global recovery is firming up” but noted that in Europe and Japan “the consolidation of the recovery is at an earlier stage versus that of the US.” On the outlook for Europe he said "we have not seen yet the self-sustained convergence of inflation to the medium-term objective," adding "therefore a significant degree of monetary accommodation is still warranted,". So, paraphrasing, monetary policy is likely to remain accommodative and there is set to be an interesting discussion with Jens Weidmann and his hawks at the next meeting.

• He tried to again make this point in response to a question with Reuters reporting “On one hand we are confident that as the output gap closes inflation will continue converging to its objective over the medium term. On the other hand, we have to be very patient because the labor market factors and the low productivity are not factors that are going to disappear anytime soon." It’s worth remembering the ECB is a single mandate – inflation – central bank.

• Here’s a counterpoint to the euro bullishness if your looking for one – and something that can boost stocks if its any chance of getting up. Gary Cohn, director of the National Economic Council, told the FT that the Whiter House is going to begin its push for tax reform this week. “Starting next week the president's agenda and calendar is going to revolve around tax reform. He will start being on the road making major addresses justifying the reasoning for tax reform”.

• I can’t understate the importance of this for stocks or the US dollar if the White House can gain get traction with the Congress. Naturally there is a lot of focus on the debt ceiling right now and that likely takes precedence in terms of timing. But this is a space to watch closely.

• US Durable goods orders fell sharply in July, down 6.8%. But when the volatility in aircraft was stripped out there was a 1.0% gain (vs +0.2% exp.). Which is solid.

• China’s industrial profits were released over the weekend and showed the slowest rate of growth for 3 months. At 16.5% in July however that’s still nothing to sneeze at.

Australia

• A small fall of just 2 points Friday saw the S&P/ASX 200 close at 5,744 as our big banks fought back into the week’s end. SPI traders have marked prices up 6 points over the weekend. That implies the market is likely to open in the middle of the past 2 week’s range, but toward the upper end of this broader 200 point band we’ve seen the 200 index trading in over the past couple of months.

• Whether the local market can again challenge the 5800 level is dependant on what we see offshore and the performance of important sectors like financials and basic materials. We’ve had further confirmation that the global economy is doing well and traders will be asking themselves about questions of value when it comes to the financial sector given current strength in the Australian economy and prospects of an eventual RBA rate rise. But frankly these are the same questions, with the same outlook, that we’ve had for a while now – yet the ASX has stayed in a range.

• That’s clear in the SPI chart. But over the past week or so the bottom on sell offs has come up which suggests there might be a little more positivity coming into the market. That’s particularly the case when you look at the performance of the overall market against some of the big cap financials. But a range is a range and I respect them – unless, or until they break.

• Looking at the week ahead we’ll have plenty to watch offshore with US GDP and non-farms. But closer to home we get another look at the recently tepid consumer confidence in Australia tomorrow with the release of the ANZ Roy Morgan weekly survey. Building approvals and the first of the Q2 GDP partials – Construction Work Done – are out Wednesday before Capex and private sector credit on Thursday and the AiG manufacturing PMI Friday.

• In many respects these releases are more important for the interest rate, bond, and forex markets. But they will impact individual companies and sectors and in doing so the overall level of the SPI and ASX 200.

Forex

• Mario Draghi will be tearing his hair out. If saying nothing can drive the euro to it’s highest level since January 2015 then the ECB president and his colleagues will be genuinely worried about the impact an announcement to further reduce its QE program could have on the single currency. That traders choose the fact Draghi said nothing about the Euro, even when he again highlighted the need for accommodative monetary policy and even when the last ECB meeting minutes showed the board as a whole is concerned over Euro strength, tells us how parlous sentiment is for the US dollar right now.

• It opens up the real question of just how far the US dollar can now fall. It begs the question of whether the Yen will strengthen and USD/JPY break the bottom of its 2017 and whether the EUR/USD can break through this consolidation band I’ve highlighted in green on my charts for some months now. That zone – 1.1710 to 1.2030/40 - is a confluence of lows and highs for the euro between 2010 and now. A break back above this zone could usher in a run of 1, 3, or 7 big figures for euro. Mario Draghi and his colleagues on the ECB governing council will not be pleased by that regardless of what traders thought Friday.

• But while the US dollar was weaker across the board the moves across forex markets were not uniform. GBP/USD surged from below 1.2800 to sit at 1.2928 in early trade Monday. That’s back toward the trendline it broke down through 2 weeks ago. USD/JPY too has lost ground as the US dollar’s fall gave the yen room to head back toward the bottom of the range – it’s at 109.20 as I write.

• Of the commodity bloc the Aussie dollar did best Friday but it has lost a little ground in very early Asian trade this morning and sits at 0.7919. If any currency shows that this US dollar move is very much an ECB/Fed catalysed one then the AUD/USD is proof. I say that because the strength of growth that Mario Draghi acknowledged at Jackson Hole is also indicative of the strength of the global economy right now. It supports the notion that the back drop for the Australian dollar, for metals prices, for the outperformance of metals and mining shares relative to the total market, and for the chance the RBA will need to hike – all these things are positive for the AUD/USD yet it is still just 20 points above 79 cents not up atop 80 cents.

• The New Zealand dollar was lifted from recent lows near 0.7190 and is at 0.7233 this morning. Traders still hold some concerns about the outlook for the economy and the potential that lower forecasts could prime minister English’s government lose the election. The Canadian dollar is stronger with USD/CAD at 1.2480. That’s just 60 points or so above the recent lows set in late July before the US dollars month of consolidation began.

• And that’s the big question, but also the feeling, among forex traders after the Euro’s surge. IS the US dollar’s consolidation now over? And if so, how low will it go?

Commodities

• Gold had a bit of a wild ride on Friday night, trading down to around $1,278 before recovering to $1,291. That leaves it still coiled within this wedge. Th recovery off the low, which was slightly outside the wedge, suggests there is still plenty of buyers in this weak US dollar environment. A break of $1,301 could see gold run higher fast.

• More than 20% of output in the Gulf of Mexico is shuttered as Harvey rips through the region.This, along with the weaker US dollar helped prices rise close to 1% which lifted WTI to $47.87 a barrel while Brent climbed to $52.41. Like gold the wedge in crude is holding for the moment.

• Mmmmm, the copper contract expires in the US on the 29th. That could make things interesting with prices up here at $3.03 a pound at the moment.

Have a great day's trading.