US Dollar Under Pressure

Originally published by AxiTrader

Market Summary (7.41am)

Yup, rinse, repeat. Again.

The week opened as the previous one had finished with more positivity and gains across global stock markets (except again the ASX), bond rates under upward pressure, and the US dollar again on the back foot.

So this morning the S&P 500 has put on another half a percent and is trading at 2,825. The Dow is up around 0.32% at 26,156, while the Nasdaq 100 is up another 0.78%. Stocks in Europe had another good day with the DAX up 0.22% and the CAC up 0.28%. But the FTSE dipped back by 0.2%. Likewise Asia had a positive day save for the KOSPI which is under pressure from tax changes.

And of course, the S&P/ASX 200 went backward 14 points closing at 5,991 just 2 points above important support. SPI traders are at it again guessing on a strong open having added 28 points to last night’s close. We’ll see today. But the pre-conditions are there for yesterday’s close to hold.

On forex market, the US dollar was under pressure for most of the night once again. In US Dollar Index terms it’s down 0.2% to 90.39 with the euro up a quarter of a percent at 1.2256 while the pound has surged 0.95% to 1.3981. The chances of a soft Brexit seem to be growing and traders like that. The yen is the only major currency to have lost ground against the dollar with USD/JPY back at 111. Of the commodity bloc the kiwi has done best up 0.6% to 0.7317. The Canadian dollar and Aussie dollar are both 0.25% stronger at 0.8011 and 1.2454 respectively.

US 10's are up at 2.66% this morning with the curve largely unchanged around 59 points.

On commodity markets, US dolalr moves seemed to influence prices with the weakness roughly synchronous the moves higher in commodity prices. Oil is up 0.55% in WTI terms at $63.66 as the front contract rolled and buyers came into the new contract. Brent is up 0.6%. Gold is at $1333 and copper is a little higher, up half a percent at $3.20 a pound.

On the day today, the BoJ meeting conclusion and decision this afternoon dominates the landscape. That will be accompanied by the quarterly economic outlook and most likely some interesting comments on the way forward for monetary policy as the economy heals from governor Kuroda.

This evening it’s the ZEW survey in Germany and Richmond fed index in the US.

Oh, and the US Senate agreed to a deal that will end the US government shutdown.

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

International

• The IMF has upgraded its growth forecast for the year ahead and given plenty of the credit to President Trump. In its latest World Economic Outlook the fund said “The cyclical upswing underway since mid-2016 has continued to strengthen. Some 120 economies, accounting for three-quarters of world GDP, have seen a pickup in growth in year-on-year terms in 2017, the broadest synchronized global growth upsurge since 2010”. That means it’s upgraded the growth projection for 2017 to 3.7% while for 2018 and 2019 it is projecting global growth of 3.9%, up 0.2% from the last forecast. “he revision reflects increased global growth momentum and the expected impact of the recently approved US tax policy changes,” the IMF said.

• In particular for the US, and something forex trader who hate the dollar might wish to take note of, the IMF said “The US tax policy changes are expected to stimulate activity, with the short-term impact in the United States mostly driven by the investment response to the corporate income tax cuts. The effect on US growth is estimated to be positive through 2020”.

• The fund also said that growth could actually outperform expectations and there could be “faster-than-expected increase in advanced economy core inflation and interest rates as demand accelerates”.

• I forgot to mention yesterday that Fundstrat’s Tom Lee has gone from Bullish US stocks to UBER-Bullish US stocks. CNBC reported that Lee said “Both [Fundstrat technical strategist Rob Sluymer and I] think it's more like 2029 is the peak of this equity market cycle and then, the S&P is 6,000 to 15,000,”. That’s a wide range obviously. But it’s the direction that counts I reckon Lee would argue. His point is “I think it's just important to be long-term oriented right now”. The view is based on his rad of the economy which he says is only in the middle of the global business cycle. I have to say in a structural sense I have great sympathy with Lees view.

• But others worry that there are “odd” things happening in markets right now. Bloomberg reports Citi analysts wrote that the divergence between the S&P’s rally and high yields is troubling. “The latter is odd and usually only occurs in an equity market dip, at least a small one, and not a rally…we are monitoring the moves in credit and equity volatility as another potentially bearish tactical signal for stocks” Citi analysts wrote. Note they say tactical. Here’s the chart of the relative moves.

Chart

Australia

• Another disappointing day on the ASX yesterday as the local market missed out in another day of positive moves around the region slipping 14 points to close below 6,000 at 5992. Of course, we can point to the specific drags of one or two of the big capitalisation stocks. But the reality is that at present the market is struggling because valuation measures are struggling AND while other stock markets across the globe are attracting fresh capital/money it appears Australian stocks are not.

• I guess the reality of that is really simple. It’s not in Australia, or the Australian economy, where the big money making opportunities lie. So investors are focused elsewhere. It won’t last forever though as the constant underperformance and then eventual snap back to new highs in 2017 showed. It’s just a question of where support will be found and fresh buyers return.

• On that front both the physical ASX and the SPI closed just 2 points above important support yesterday afternoon. Sure SPI traders have put in 28 points again overnight but it’s last night’s closes which are important. Should 5989 break in the physical and 5935 give way in the SPI then the ASX could have another 50-100 Point dip. But while these levels, and last nights close hold the ASX can start to rebuild and head higher. Today should be a better day on that basis. Here’s the SPI chart:

Chart

• The Aussie dollar is sitting at 8- cents again this morning. At 0.8005 it’s up 0.2% on the day but off the high around 0.8027 before the news that the Senate was voting to end the government shutdown. It hasn’t been a bad day for base metals, copper is up a little and the rest of the complex is flat to up, while iron ore is mixed. The reality though is that the Aussie’s moves reflect the moves in the US dollar at the moment. And that means the BoJ and ECB meetings are likely to be as important for the AUD/USD as they are for the yen and the euro. On the day support is at 0.7980, and 0.7993 while resistance is 0.8027 and 32.

Forex

• If you are of a certain age you may remember an old ditty that went something like, “nobody likes me, everybody hates me, I think I’ll go and eat worms”. I can’t help but think of that song when I look at the trials and tribulations of the US dollar over the past month or so. Regular readers know my hypothesis that the US dollar is always fighting a rearguard action because in a world of synchronised and solid growth its data comes out last – of the majors – so all the algos, traders and money managers have already bought yen, Yuan, euros and so on. It’s the same with the soft Brexit story. That’s an implied economic lift for the UK economy and traders are acting as such.

• But traders are also projecting forward a long way to support this US dollar selling. That’s because they believe not only that the other big central banks will follow the Fed higher with interest rates but when the Fed stops others will still be moving. At least that is what forward pricing seems to suggest. It’s a long way out inn the future and I think it underplays the real impact of the tax cuts on US economic activity and thus a more aggressive Fed response. For now though I’m waiting on the pessimistic crescendo we need for a US dollar bottom to be sustainable.

• Anyway, today’s forex chart of the day is GBP/USD – weekly. It’s clear the uptrend is strong. And it’s clear that fundamentally this uptrend is being driven by hopes of a soft Brexit and better economic outcomes. But in price terms the 35 day correlation between the GBP and EUR is above 0.9, with the Aussie it is around 0.85, and with the Singapore dollar and yuan it is about 0.9. So this is a US dollar move too. Resistance comes in around 1.4133. Maybe that’s when we get the pessimistic crescendo in the US dollar it needs to form a base.

Chart

Commodities

• Everything is about the dollar this morning it seems including the price of oil. That should be no surprise though because for all the chat about supply and demand, what OPEC will and won’t do the most interesting stat for me on the price of WTI and Brent is that the 35 day correlation with the euro is 0.90 and 0.86 respectively. It’s much lower over 95 days at around 0.50. But the more recent correlation tells a story that in the back end of 2017 and so far in 2018 whether it’s forex or commodities the US dollar’s demise is an overriding factor in price moves. It won’t last forever but it means the ECB might be important for the oil price later this week.

• Anyway, last night WTI spiked and I’m still investigating why. But overall the price action is consistent with a stall in momentum, perhaps a topping pattern for the short term as prices stall below the current channel tops and as the market (as measured by the CFTC) gets even longer of oil. I minded of copper and it’s boring unspectacular drift recently. Here’s the WTI chart. A break of $62.76 would move things along.

Chart

Have a great day's trading.