Originally published by AxiTrader
Market Summary (7.30am)
US Treasury Secretary Steve Mnuchin abandoned any pretext to the long-established strong policy overnight saying that of course, the US benefits from a weaker dollar.
We all know that. But not since Lloyd Bensten in the 90’s has a Treasury Secretary so obviously abandoned any pretext of dollar strength. Mnuchin’s timing could not have been more perfect to coincide with the pressure the US dollar was under recently.
As a result, the US Dollar Index lost 1% to 89.21, euro rallied a little less than that and is above 1.24, the pound surged 1.5% to 1.42, and the yen gained another 1.12% and is trading either side of 1.09 at the moment. For the commodity bloc there was also strength with the Aussie and kiwi up 1% each sitting at 0.8074 and 0.7427 while the Canadian dollar is 0.7% stronger at 1.2323 in US dollar terms.
The apparently mercantilist nature of this Administration which has abandoned the dollar, imposed tariffs, and is clearly following the America First policy prescription of the US President is causing some disquiet in stocks at home and abroad. As a result all of Europe was lower with currency strength hurting the FTSE and DAX which both fell a little more than 1 percent.
In the US after such a good start to the year, a pullback is hardly surprising. So I won’t over egg it. The S&P 500 is flirting with losses at 2838 after testing a very important trendline which had its origin at the low of 2009 (see below). The Dow is up a little, while the Nasdaq 100 has given back 0.5% to 6,929.
Given correlations and the US dollar denomination of most commodities its natural that gold, oil, copper, and other commodities are higher this morning. Gold is up 1.21% to $1357. Copper has rallied almost 4% and is back at $3.21 in an amazing turn around from yesterday’s move while oil is up 1% in WTI terms to $65.1. The inventory draw and comments from Russia energy minister Novak helped.
On the day ahead the ECB stands out as the key event. What Mario Draghi could do or say to halt the euro’s rally now is difficult to know given the strength of the EU economy and Mnuchin’s comments.
Before that though we get NZ Q4 inflation this morning, South Korean Q4 GDP. Tonight in Germany we get the release of Gfk consumer confidence and Ifo business climate. Jobless claims, inventories, trade, and new homes are out in the US.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US Treasury Secretary Steve Mnuchin will likely claim he was only stating the obvious overnight when he said (my bolding for the bit that traders picked up on) “The dollar is one of the most liquid markets. Where it is in the short term is not a concern for us at all. A weaker dollar is good for us as it relates to trade and opportunities. Longer term, the strength of the dollar is a reflection of the strength of the US economy and that it is, and will continue to be, the primary reserve currency”.
- But as a former Goldman Sachs (NYSE:GS) banker, and as the producer of many of the globes biggest movies over the past decade he knows exactly the impact of a weaker dollar on returns to US businesses and of the competitiveness benefits that accrue. So even though his colleague, Commerce Secretary Wilbur Ross, said Mnuchin wasn’t advocating a weaker dollar the damage has been done. Indeed I would argue that Ross’ actual comment in fact reinforces what Mnuchin said. You be the judge. “He wasn’t advocating anything. He was simply saying, it’s not the world’s biggest concern to us right now”. Clearly not. And although Ross added “What he exactly said was the dollar, just like the Treasury bond market, is a huge market, a very liquid market, it’s not something we worry a lot about day by day” it is all a green light to the dollar bears.
- This all sets up exactly the type of pessimistic crescendo needed for the US dollar to bottom for this move. But the question of where that level will be is a little problematic and after the brutal action of the past week or so it’s going to take an absence of sellers rather than a surge of buyers for a bottom to form. No one likes trying to catch a falling knife. But there are a couple of levels I’m watching. The first is the 88.30/50 region I’d identified a while back as a possible level based on a previous high in 2010. But there is a coincidence of support/target in the mid 86 region from both a trendline and FIbo extension of the break of the previous low at 91.
- This US dollar rout, other currency rally, is no small thing. The level of a currency, its value against the rest of the world, is one of the most important transfer prices in an economy. Especially if that economy is an open one like Australia. It’s why the RBA has warned about the appreciation of the AUD/USD potentially complicating the recovery. And that is exactly what central bankers and governments all over the world are going to have to deal with. A weaker US dollar, America First!.
- But as Italian PM Gentiloni said in Davos overnight “I totally respect the fact that he (President Trump) was elected with the idea of putting America first, and he is trying to deliver in this direction” as is his administration. Mnuchin may not have meant for the US dollar to fall out of bed last night. But clearly, in his and Ross’ comments, the US is not fazed by US dollar weakness. In fact the President has welcomed it in the past.
- If I can summarise what this all means to me though. Either explicitly, as Ross did, or implicitly, as Mnuchin did, the administration has signaled it’s not bothered by where the dollar is or goes day to day. So even if this is not policy shift from the administration doesn’t matter for traders. What we have here is a signal of a policy of benign neglect of the financial markets side of the question of dollar strength in favour of the trade side of the equation.
- Which brings me to the other big event overnight. Possibly more monumental than the US dollar being thrown under the bus. The S&P tested a very important trendline last night. It’s the trendline which stretches back to that day in March 2009 when the S&P hit its GFC low of 666. That line was initially support of the rally off the lows and then when it broke it again reasserted itself as the top of the up trend channel of the rally which began in 2011 and ended in 2015. It’s the first test since 2014 and after 9 years you need a very fat pencil to draw it as even the smallest deviation in angle could mean it’s 20 points higher or lower in reality. My point though is that with so many forecasters expectations for where the S&P 500 would end the year already eclipsed this may give some guide as to where prices may meet actual resistance. Anyway, here’s the chart.
Australia
- Not a lot to say about the local market yesterday other than it roughly lived up to SPI traders expectations the previous night. That the market couldn’t kick strongly away from 6,054 in physical terms or 6,000/6,005 in SPI terms suggests the bulls are not yet back in control. That’s something the candlestick on the SPI this morning certainly suggests as well. It’s indecisive after traders knocked 14 points off yesterday afternoon’s close. Essentially the range looks like 5935/6025 for the moment. Here’s the chart.
- I can’t wait to see the December retail sales report when it is released next month for Australia. I say that because tow surveys released this week – the seasonally adjusted Commonwealth Bank series based on its network and the NAB’s version of the same – have both suggested that Australian shoppers went back into their shell after November's splurge on iPhones. If that’s the case then perhaps things aren’t as rosy as they seem at a household level despite the solid employment picture. We’ll just have to wait and see.
- The Aussie dollar is up 1% now at 0.8074 on the back of this US dollar weakness. That has fed into commodity prices as well so the Aussie gets a bit of a double whammy. This move is all about the US dollar. So the prospects of the Aussie pulling back depend largely on what happens to the US dollar. Next week’s CPI will naturally be important insofar as it will inform what the RBA does with interest rates this year. But we could be at 82 cents by then unless Mario Draghi is particularly influential tonight. And on the RBA and the Aussie at present. It’s likely to be a little uncomfortable with the strength but equally understand there is little if anything that it can do about it.
Forex
- It’s all about the US dollar at the moment, price correlations are very high among pairs with the dollar’s weakness the overarching narrative. Mnuchin’s comments fit perfectly with that narrative which is why they had such resonance with traders and impact on prices. I’ve discussed the DXY chart above which may offer a technical level where the dollar may find support. But a fundamental question of where the circuit breaker may lie is more problematic. EU flash PMI’s and UK jobs last night, Japanese trade, flash PMI, coincident, and leading indicators yesterday all pointed to this synchronised growth which has traders and investors focussed on policy normalisation in other jurisdictions. It also has them focussed on other opportunities and relative value given the pace of US stock market appreciation and the prospect of a bear market in US bonds.
- So when Mnuchin throws in the prospect of further currency loses on US assets it’s easy to understand why the dollar was hammered overnight. As I said in the introduction we now have the preconditions for the pessimistic crescendo that we’ll need to see for the US dollar to put in a bottom. The question is where?
- And for that, we might be able to combine the Euro and DXY outlooks. Now I know it’s double counting because the euro makes up so much of the DXY (its why I have my own measure of USD) but the break of the recent high suggests a move toward the old trendline resistance from 2010 which comes in around 1.2700/50 which coincidentally is also where the 138.2% projection of the rally sits. Here’s the weekly euro chart.
Commodities
- The Saudi’s and Russians continue to work together to talk the oil market higher and last night the countries two oil ministers said they were working together on other longer term projects as well. That, and the US dollar fall, along with another inventory draw (but also US production edging toward 10 million barrels) combined to drive WTI up 2% to $65.79. with Brent up 1% to $70.72.
Have a great day's trading.