US Dollar Defies Weak Data

Originally published by AxiTrader

Market Summary

US data disappointed last night and US bonds rallied a little but the US dollar held firm for a change. Perhaps that was because we heard from two very influential Fed players in the past 24 hours who reiterated the Fed will keep tightening and start negative QE with its balance sheet unwind.

US 10's are at 2.13% and the US Dollar Index is at 97.42 this morning.

Overall forex markets are unchanged but that belies the US dollars recovery. Of note the Aussie made an assault on 76 cents again before the bulls were chased back. But at 0.7580 it is still 0.2% higher day on day.

On stock markets the big US indexes were mixed. The Nasdaq was chased back from its highs and closed down 0.29% at 6,247. The Dow was up 0.07% and the S&P made an even smaller gain of just 0.03% to close the day at 2439. Europe had a much better day of it but the S&P/ASX 200 looks set for a quiet day with the SPI up just 1 point overnight.

In many ways gold was the big story after a large sell order hit the market knocking prices 1% lower while oil continues to base and is up around 1%. Copper and base metals remain relatively firm. Iron ore was up a smidge overnight.

Elsewhere president Trump had a limited win in the US Supreme Court for his travel ban. And Theresa May has stitched up a deal with the DUP to govern.

On the day ahead we get speeches from Mario Draghi, the RBA’s Guy Debelle, BoE’s Mark Carney while the BoE also releases its financial stability report. Tonight we get Janet Yellen speaking. That’s the big event.

Here's What I Picked Up - in a little more detail

International

• US durable goods (-1.1% v -0.6% expected) missed badly last night and the Chicago National Activity index slipped into the red with a print of -.26 last month. Taken together they are just more threats to the Fed's assertion the US economic dip we are seeing in the data right now is transitory. The weakness is keeping long bonds bid and the US dollar weak even though the Fed continues to make it clear the tightening cycle continues.

• On that front we heard from both San Francisco Fed president John Williams and NY Fed president Bill Dudley in the past 24 hours. Williams said he sees the inflation target hitting the 2% target in 2018, that he’s in favour of further gradual rate rises and a normalisation of the Fed’s balance sheet.
  

• While Dudley widened the Fed's remit materially in a subtle sign that perhaps he and his colleagues see the current stock market rally as frothy. Dudley said broader financial conditions have eased and should be taken into account when the Fed is setting policy rates. “When financial conditions ease, as has been the case recently, this can provide additional impetus for the decision to continue to remove monetary policy accommodation,” he said.

• Mario Draghi will be speaking today and I’d expect him to continue to say what he said overnight that Europe still needs further monetary stimulus. But the head of Rabobank said the time has already passed for the ECB to start raising rates. On that note Germany’s Ifo institute reported a lift in business confidence from 114.6 in May to 115.1 in June as shoppers buoyed sentiment.

• POLITICS: The US Supreme Court gave limited approval to president Trump’s travel ban overnight allowing the exclusion of travellers from the identified nations who don’t have “bone-fide” reason to travel to the US. The court will hold a full hearing into the ban in the US Autumn. British prime minister May has cobbled together the deal with the DUP to keep her government alive for the next two years when it will be renegotiated.

• When I wrote yesterday’s note I hadn’t had a chance to have a good look at the BIS report. But like many of the supra-national reports over recent months it was another positive upgrade and outlook for global growth. The key paragraph readers need to understand is the second para in the introduction – Towards resilient growth. The BIS said (my emphasis), “What a difference a year can make in the global economy, in terms of both facts and, above all, sentiment. The facts paint a brighter picture. There are clear signs that growth has gathered momentum. Economic slack in the major economies has diminished further; indeed, in some of them unemployment rates have fallen back to levels consistent with full employment. Inflation readings have moved closer to central bank objectives, and deflation risks no longer figure in economic projections. But sentiment has swung even more than facts. Gloom has given way to confidence. We noted last year that conditions were not as dire as typically portrayed. Now, concerns about secular stagnation have receded: all the talk has been about a revival of animal spirits and reflation on the back of buoyant financial markets. And with the outcome of the US presidential election as a turning point, political events have taken over from central bank pronouncements as the main financial market driver”. Make no mistake – this is positive. No wonder stocks remain elevated.

Australia

• Not much to say about Australia today – so I won’t belabour it. On the physical S&P/ASX 200 the rise of just 4 points and close at 5720 masked what looks to me to have been a failure close to the range top. Yesterday I identified a 5757-5665 range as containing the ASX200 – at least until it does not. So yesterday’s high at 5749 is near enough for me to characterise it as a fail.

• When I look at the daily candle on the SPI 200 (up just 1 point overnight) I see a positive day but an ugly long-tailed candle. More interesting, at 5667 the SPI is back in the lower half of the very recent, wildly volatile, 5745-5598 range. Overall the SPI, and the ASX200, remains in a broad downtrend.

• Here’s the daily SPI 200 chart:

Chart

Forex

• Riddle me this. US data is awful, durable goods miss and the Chicago activity index suggests growth below average and the US dollar fights back across the board to be flat to slightly better bid against most pairs. My hypothesis would be that central bank outlooks matter and Bill Dudley’s comments juxtaposed with those from Mario Draghi highlight the Fed is still going to tighten and undertake negative QE, while the ECB sits pat.

• The awful US data flow remains a handbrake on the dollar. The Citibank Economic Surprise Index dipped to 78.5 last night, but policy differentials still matter. Now if only the data in the US would turn to back the Fed up and we could see a massive dollar rally. I’m still watching 97.80 and then 98.50 in DXY terms – it’s at 97.43 this morning, up 0.17%.

• Euro is currently at 1.1180 barely changed but I see a currency stuck between resistance at 1.13 and support at 1.11. Monday is a down candle and the inability to hold above 1.1220 suggests another test toward the recent lows.

Chart

• USD/JPY is up about half a percent this morning at 111.82. That’s a new high for this run which suggest this pair has got the legs to run higher and possibly lead the US dollar out of the doldrums. GBP/USD was a little higher after the Conservative/DUP deal was announced but at 1.2722 it is largely unchanged this morning.

• Looking at commodity bloc currencies and the kiwi is largely unchanged at 0.7280 as it hits resistance and I think is finding the air a little thin at these levels. The Aussie ran toward 76 cents again overnight making a high around 0.7598. It’s back at 0.7580 up 0.2% day on day. It’s hanging tough all things considered.

• The Canadian dollar was stronger with oil overnight but a lot of that has washed away with the USD/CAD back at 1.3250 down just 0.13%.

• Elsewhere EM oil currencies are starting to catch a bid

Commodities

• Gold had a big fall when a big trade hit the market yesterday afternoon in Asia. Reuters reports a sell order for 18,500 lots of gold is said to have hit the market along with a simultaneous order to sell 5,000 lots of silver. That knocked gold down to around $1,236 before it rallied back to $1,246. It’s at $1,244 now down about 1%.

• One bright spot for the bulls is that gold managed to find support at the 200-day moving average which was effectively the ding dong low. That level – the 200-day ma – is going to be important support if gold is to recover, or not as may be the case. Here’s the chart

Chart

• Oil is continuing to try to build a base. This is important. As I wrote and certainly said in my daily video’s it felt like we were hitting peak bear last week when I look at the media and commentary. We didn’t see the pessimistic crescendo in daily prices we saw with the spike low in April but after 5 weeks of selling there is much bad news priced in.

• So we have WTI up 1% to $43.44 and Brent up 0.86% to $45.93. WTI is at an important technical juncture. It has broken the 5-week downtrend on the daily charts. My system is long but a move back above $43.73 would confirm that the price has made an interim – at least – bottom. $45.83 would then be the target.

• Copper looks bid. Even with the weak US durable goods orders it’s largely unchanged at $2.63 a pound after falling to $2.60. Most of the base metals complex is flat to positive this morning while iron ore was flat overnight.

Have a great day's trading.