Despite good economic data last night the stock market got punished. A third day of selling in stocks has pushed VIX over 14 as it seems people are starting to lock in profits in that market with concern that the Fed will commence tapering the $85B spending soon. Commodities had a decent night though with oil bubbling up 2.3%, gold stabilising although copper is off 0.5%. Bonds predictably were up a few ticks as funds flowed into safe havens.
This normal flow of funds, from high yield/high risk (stocks) to low yield/low risk (government bonds) saw the majority flow into Japanese and European, however also included, Aussie bonds, and why not? Glenn left rates alone so we still have the highest and safest bonds out there.
Glenn couldn’t help himself though, he had to attack the little battler in a futile attempt to drive the Aussie lower. I have been asked if the $8B gift from Hockey will be spent driving the Aussie lower. Not likely at all. Eight Bill is a measly amount compared to AGSP2’s current 85B per MONTH spend. With the higher Aussie dollar it reduces the value of the RBA foreign exchange reserves and foreign bonds, thereby reducing it’s income and capital buffer it needs to operate. One function of the RBA is to make payments in foreign currencies for the federal government, say if it buys new warplanes the RBA will take on the currency risk of US dollars. Trying to sell Aussie dollars with $8B would only move it, temporarily, a cent or maybe two. The FX market is too deep and liquid and it would soak that amount up far too easily. It is also about Glenn’s legacy and performance paycheck. Here is more on it, and more again.
DATA HIGHLIGHTS TODAY – AU GDP. UK Sevices. US Trade balance & New home sales & non-manufacturing PMI. CAD trade balance & MONETARY POLICY
AUDUSD – Hanging onto 91cents for grim death whilst Steven’s attempts to stamp on our fingers. However, we now have a good strong day and starting to really see momentum shift back to the upside. What will ruin the parity party is AGSP2 and tapering which would see Greenback strength, so Non-Farm Payrolls on Friday and the FOMC on Dec 19th will be key times to be aware of.
EURUSD – The Euro put in a quick reversal and setup “train tracks”. I read that funds exiting stocks are heading back to euroland first, that US money is coming out of stocks yet, or at least not staying in US bonds but heading to Europe, UK, Japan and even Australia first. Anyways, good strong move by the Eurodollar and I expect it to retest 1.38. There is a head and shoulder pattern forming though so if it cant get through 1.36 decisively it would be time to reconsider the long position.
GBPUSD – Another high test bar as they had stellar construction data. I have indicated it is due for a pullback and I am unwilling to buy it just yet. The BOE is out tomorrow night so I would prefer not to be exposed to its volatility right now, but we are starting to see the selling pressure mount now.
NZDUSD – Has come up to test the 50ema and is now back inside the range of 82-83 cents. I do not see this being long lived though, it is an interest rate carry trade that got it here with little other reason to own kiwi dollars. Still, you cannot deny the strength in the move at the moment.
USDCAD – The Loonie is suffering from what the Aussie had, a government and central bank actively trying to destroy the currency. Johnny-come-lately’s do not understand that the currency war is in its dying stages with the larger combatants trying to exit the war, there is little reason to be fighting now. Headlines overnight indicating that the BOC will lower rates tonight saw the Loonie test 2010 highs at 10670. No sign of any selling yet but it should come soon as it is in exhaustion zones.
USDJPY – Large engulfing seller bar could be the sign that this run is temporarily done. The Japanese have been printing cash since the 90’s and will not stop now, however there will be the natural minor correction before having a new run at 110.
GOLD – The answer was yes and it stopped on minor support and any tapering will bring fresh selling.
David Long / Proprietary Trading Manager