The US Dollar Lost But Regained Its Footing

Originally published by AxiTrader

Key Takeaway

Stocks were fairly quiet as traders and investors wait for the release of crucial non-farm payrolls and unemployment data in the US tonight.

The US dollar on the other hand came in for a hammering but bounced back. But the Bank of England was adjudicated "dovish" by the market and sterling came in for a big fall down 1%. The Australian dollar on the other hand was up 1% on the back of a massive trade surplus.

Gold made a new high and if it closes the week above $1220 it could be in for a big rally. Oil was fairly calm, copper dipped back and China is back from holidays today. That could get things moving in Asia.

What You Need To Know

• S&P 500 -2 (0.07%) 2278
• Dow -7 (0.03%) 19884
• Nasdaq 100 -11 (0.2%) 5632
• SPI 200 +1 (0.0%) 5999
• AUDUSD 0.7660 +1.01%
• Gold $1215 +0.5%
• WTI oil $53.61 -0.5%

International

• A quieter, range bound night for stocks in the US last night with prices either side of flat for most of the night but dipping into the close. Bond rates dipped a little and the US dollar pushed back after dropping to a new low for this run at 99.23.

• Data in the US was pretty good with initial jobless claims dipping to 246k. But productivity data showed growth of just 1.3%. But that’s better than the 1% forecast by economists – so on balance a net positive.

• Do you want a window into what is driving Donald Trump? If you do find some footage of a speech he gave at a prayer breakfast overnight. “The world is in trouble, but we're going to straighten it out, OK? That's what I do - I fix things," Trump said in his speech. Trump the fixer folks. But he also said don’t worry about his phone calls. “when you hear about the tough phone calls I'm having - don't worry about it. Just don't worry about it” he said. That was in reference to news yesterday about the tone of his conversation with Australian PM Turnbull AND, something the local press seems to have missed, the president of Mexico. This strikes me as politics after both leaders, or in the case of Mexico government officials, suggested some conciliation/deal from the new administration. Trump, or his advisors, clearly want to control the narrative. Anyway, as I say try and get hold of that speech from last night.

• Speakiing ot Trump - he also spoke overnight about rejigging the NAFTA deal. He want's another F - Fair. And he's not bother if its a brand new deal or just a re-negotiation.

• The Bank of England was a little Dovish last night which hit sterling and saw rates rally. Mark Carney and his colleagues voted to leave rates on hold. And even though they upgraded their growth and inflation outlooks Growth this year was increased from 1.4% to 2% while the bank believes inflation will peak at 2.75% in 2018. But the BoE expects growth to pull back to 1.6% in 2018 and 1.7% in 2019.

• For me the source of the dovishness seems to be the apparent comfort with unemployment falling to an expected 4.5% now from 5% previously and the signal from Mark Carney that he still has concerns about Brexit’s impact in the economy. He said "the Brexit journey is really just beginning", with "twists and turns" to yet to come. So even though some members have “moved a little closer” to their comfort level for UK inflation suggesting the next move is higher it is still some way off. Personally I think the BoE has played a good hand and a straight bat. They delivered what I expected. A reversal off overhead resistance for Sterling is utterly understandable in that context.

• Here’s GBPUSD daily.

Chart

• Mario Draghi said the benefits of leaving the euro are a Mirage in a speech overnight. He told an audience at a dinner celebrating Lithuania’s 10 years in the euro that governments have themselves to blame and ditching the Euro won’t help them. “Countries that have implemented reforms do not depend on a flexible exchange rate to achieve sustainable growth” he said adding “If a country has low productivity growth because of deep-rooted structural problems, the exchange rate cannot be the answer.”

• Germany folks. The nation went into the euro at a fix that was viewed as too high relative to the franc and other member currencies. So the nation had to overhaul productivity capacity and productivity. Now, when the euro is relatively weak it wins both inside and outside the euro bloc.

• Also on the ECB an economic bulletin overnight showed the bank will look through the increase in inflation coming from the recovery in oil prices. Reuters reported the ECB said “As expected, headline inflation has increased recently, largely owing to base effects in energy prices, but underlying inflation pressures remain subdued…The Governing Council will continue to look through changes in (headline) inflation if judged to be transient and to have no implication for the medium-term outlook for price stability”. But it was okay to get all paranoid about the oil induced fall in inflation folks. Central bankers, gee whiz.

• The US Treasuy has eased Russian sanctions mildly.

• The UN said overnight that global food prices are back up near 2-year highs. Prices in January rose 2.1% with the UN’s index rising to it’s highest level since February 2015.

• China’s outflows in 2016 were a record $775 billion according to the Institute of International Finance. That’s $50 billion more than 2015 and well north of 2014’s $160 billion outflow. Interestingly the IIF says there was a massive $95 billion flow from China in December.

• One thing worth noting is that the IIF said “If U.S.-based multinational corporates start to repatriate their profits from China, outflows could worsen further in 2017”.

• Other emerging markets are still seeing inflows and the IIF data showed a $12.3 billion flow to EM.

• The Swiss National Bank board member Dewet Moser said the SNB will be able to normalise monetary policy and shrink its balance sheet soon.

Australia

• Stocks in Australia went nowhere yesterday. But on the charts that was a pretty disappointing outcome. The higher Australian dollar – after the spectacular trade figures – seemed to sap the markets strength. But that data also speaks to stronger GDP growth for the nation. Of course some could argue it will be a very defined and finite group of companies that benefit from this I have an alternative argument. That is behaviourally folks look at what’s happening around them. The level of prices, the stock market, and they take notice of GDP. So the negative September GDP we saw released last year has the double whammy of reflecting a weak spot in the economy but then the “Headline Effect” is that the weak number then also worries consumers and business. SO we could get into a spiral.

• So the chance of a healthy GDP for Q4 2016 when it is released on March 1 is a boon for confidence and in turn economic growth – even if that’s via a derivative effect.
• Back to the S&P/ASX 200 chart and you can see while it holds above 5600 it looks okay. It’s even – possible – mapping out a potentially bullish formation.

Chart

• I did a specific piece on the Trade data and Aussie dollar yesterday afternoon.

• The short term key for the local market, and the Aussie dollar, is the release tonight of non-farm payrolls. The market is looking for a rise of 175,000.

• Also, on the diplomatic front you couldn’t turn around without hearing about the “phone call” between president Trump and prime minister Turnbull yesterday. Donald Trump’s tweet that it is a dumb idea and blaming the Obama administration plays good politics in the US given everything else going on with his Immigration ban and doesn’t mean the deal can’t go on. That’s something that White House spokesman Sean Spicer highlighted last night. The refugees will simply undergo “extreme vetting”. The dissonance here in Australia on why we need a deal to re-settle folks found to be refugees from those islands I’ll leave to others to explain. You can see why POTUS might think this is a dumb deal. Anyway, moving on.

Forex

• The US dollar is still under pressure. But for the second, or is third or fourth, day in a row it has fought back from the brink. Certainly it made a lower low, so it’s still in a downtrend. But there is some support for it above 99 now it seems.

• More likely though the is reistance to the euro, yen, pound and Aussie rallies – they all reversed off extremely important technical levels.

• That sets up a tantalising chance for e US dollar break down, other major breakout, on the back of the non-farms tonight. Equally though, and this is more often the case, a relatively strong non-farms would reinforce the strength of the US economy and the dollar and see USDJPY respect 112 as it did last night.

• That means USD/JPY has again bounced off the 38,2% of this rally. 112 is a huge level.

Chart

• Looking at the AUD/USD it peaked at 0.7796 overnight as traders booked a little profit and the US dollar overall was a little stronger. I’ll talk more about the Aussie in my specific piece later this morning. But suffice to say the chance of a big rally is growing.

• A quick around the grounds shows the AUD/USD is at 0.7659, USD/JPY at 112.72 (112 low again), euro is at 1.0767, and GBP/USD is at 1.2528. These are big reversals outside of the Aussie.

Commodities

• Crude oil traders aren’t exactly sure what the next catalyst will be. After the Iran/US face off yesterday saw prices rise around 1.4% WTI oil is off 0.3% to $53.72 with and Brent down just 0.14% to $56.72. We are in a sideways pattern waiting for the next shoe to drop.

• Keep an eye on gold. It made a high overnight at $1225 before dropping back as the US dollar strengthened to sit at $1215 now. This weekly close is going to be very important for the overall trend. A close above $1220 would be very bullish.

• Copper is lower, losing 1.24% to $2.67.

Today's key data and events (all times AEDT)

• Australia - AiG Performance of Services Index (Dec) (9.30am)
• New Zealand - ANZ Commodity Price (Jan) (11am)
• China - Nil
• Japan - BoJ Monetary Policy Meeting Minutes (10.50am)
• Germany - Markit PMI Composite (Jan), Markit Services PMI (Jan) (7.55pm)
• EU - Markit Services PMI (Jan), Markit PMI Composite (Jan) (8pm); Retail Sales (MoM) (Dec), Retail Sales (YoY) (Dec) (9pm)
• UK - Markit Services PMI (Jan) (8.30pm)
• Canada - Housing Starts s.a (YoY) (Jan) (12.15am); Ivey Purchasing Managers Index s.a (Jan), Ivey Purchasing Managers Index (Jan) (2am)
• US - Average Hourly Earnings (MoM) (Jan), Labor Force Participation Rate (Jan), Average Hourly Earnings (YoY) (Jan), Average Weekly Hours (Jan), Nonfarm Payrolls (Jan), Unemployment Rate (Jan) (12.30am); Markit Services PMI (Jan), Markit PMI Composite (Jan) (1.45am); ISM Non-Manufacturing PMI (Jan), Factory Orders (MoM) (Dec) (2am); Baker Hughes US Oil Rig Count (5am)

Have a great day's trading.