DailyFX | May 4 2013 2:18 EDT
There are many fundamental contradictions that are bound to fall apart for the markets – and the discrepancy between the S&P 500’s record move and safe haven USDollar’s stubborn hold to two-and-a-half year highs is one of the most endangered.
Range Trade Strategies work best in quiet market conditions - such as the Asia trading session
Dollar Slides after NFPs Shove S&P 500 to Record High
There are many fundamental contradictions that are bound to fall apart for the markets – and the discrepancy between the S&P 500’s record move and safe haven USDollar’s stubborn hold to two-and-a-half year highs is one of the most endangered. This past week, the combination of relief in the Fed’s avoidance of setting a plan for managing QE and a positive showing from the labor data offered a perfect combination for investors looking for a reason to leverage up. The move above 1,600 for the benchmark equity index personified the exuberance, and the natural momentum of the upgrade ensured commitment. Yet, traditional market returns are still near record lows, participation is struggling and asset prices are rich. This is an issue only so long as investors believe it is – and collective beliefs require clear themes to change. If it dawns that stimulus will end, there would be no greater scythe to risk taking, but that has yet to transpire. In the meantime, the dollar tries to hang on.
Euro Fundamentals Worsening, Difficult to Veil Despite Risk Trends
The euro may have found a spat of relief from the European Central Bank’s restrained policy move this past week, but the situation is hardly bullish. Months ago, an argument could be made that the shared currency was attractive for its greater yield potential; but the stimulus efforts of the ECB have all but erased any hope of return on ‘safe’ assets in the region. Investors have taken to the more exceptional risks of periphery debt from Spanish to Greek sovereign bonds, which themselves have seen yields drop on demand. This is the epitome of desperation for yield. To top off weeks of discouraging fundamentals, the European Commission further downgraded the 2013 growth outlook for the region to a 0.4 percent contraction. The outlook is lifeless, but capital seeks any and all yield. But given all problems in the EZ, should the tide go out…
British Pound: Should Sterling Bulls Fear the BoE Rate Meet?
On a docket spotted with notable event risk, the sterling carries one of the more noteworthy releases: the Bank of England rate decision. Nothing is expected of the central bank, but therein lies the opportunity for a more significant surprise and currency reaction. The last time the policy group met, they surprised doves who had expected the Chancellor’s remit (allowances to deviate from its inflation mandate), the general malaise of the economy and actions of fellow policy groups would spur the MPC to action. Yet, they held the line. The pound has regained significant ground since then as bearish fears were unwound. Yet, we shouldn’t write off the possibility that fresh support will be offered and the sterling be hurt for it. Given the ECB moved the non-traditional and non-QE route, the BoE has a track to follow.
Australian Dollar May not Be Able to Handle Another RBA CutDespite enjoying the highest benchmark yield amongst the majors, the Australian dollar fell against most of its counterparts this week – and did so as equities hit records… Given the blind demand for return, it should be very concerning that this investment currency is showing such an uneven performance. Moving forward, this unusual bearing will be fully exposed by a heavy docket of event risk. Perfect fodder for volatility – and a significant sway over growth expectations when those matter again – we have employment, retail sale and trade data on deck. The real potential rests with the RBA rate decision though. There seems a near 50-50 chance of a move according to swaps, and that will spur concerns. With China showing signs of slowing and the Aussie dollar refusing to ease, can the central bank afford not to cut?
Japanese Yen: The Yield Chase Feed the Bubble, But for How Long?
Since September, USDJPY has advanced as much as 30 percent. That is a long way to move in such a short time – particularly for the relatively calm FX market. What is even more remarkable about this impressive move is the fact that the market has put in for a meaningful correction to allow for profit taking and offer attractive levels for new players to enter the trade. The yen crosses have become the currency model to the extreme conditions in global markets. An all out appetite for return has dropped traders’ sense of risk – few would say the yen is not at least moderately oversold in the short-term – in the pursuit of carry. However, that carry is extremely thin. The yield differentials on pairs like EURJPY, AUDJPY, NZDJPY and others are record lows. This run doesn’t have to stop as long as the risk drive continues. Yet, should investors catch any whiff that an unwind is nigh; these over-extended pairs could perhaps be the most exposed.
Canadian Dollar Deals with a New BoC Governor, Jobs Data Ahead
The Canadian dollar managed to advance against all of its major counterparts this week – a considerable feat given the strength of risk trends (which could have favored higher yielding currencies) and the level of event risk. The strong showings in February GDP and the March trade balance no doubt played a role in that strength. Fundamentals will continue to carry a heavy sway over the currency in the week ahead. For traditional event risk, the April employment statistics due Friday are top billing. Yet, that doesn’t come into play until the end of the week. The risk of event risk can actually temper movement before its release and prove more burdensome than helpful to active traders. That said, the possible bearings of the newly announced BoC Governor-designate Stephen Poloz could capture rate watchers’ imaginations.
Gold: Bullish Positioning Hits a Four-Year Low, $1,500 Looking Insurmountable
Following a week-and-a-half of recovery, gold spent this past five trading days bleeding momentum and developing congestion. Considering the well-worn $1,500/25 stand overhead, bulls have lost their influence at a particularly inopportune level. Yet, it is inevitable that the recovery effort would stall before a serious advance to new highs without the commitment to drive the market beyond its former floor. From a fundamental perspective, the balance of power has shifted. Fear of devalued currencies – a key support for the alternative to fiat assets – has lost its potency in the financial world’s relentless search for yield. Gold provides no yield. Profit only comes when the position is closed; and for long-term bulls, that realization is starting to set in. Meanwhile, a look to market positioning further reflects an unflattering view for gold. The CFTC’s Commitment of Traders (COT) report revealed futures traders further reduced their net long interest in the metal to their lowest levels since December 2008 this past week. Similarly, ETF holdings of the metal dropped another 0.9 percent this past week – a 14 percent drop from December.
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
Official Reserve Assets
TD Securities Inflation (MoM)
A monthly estimate of inflation in the Australian economy; Has pointed lower for 3M, providing more room for the RBA to cut interest rate on May 7.
TD Securities Inflation (YoY)
Retail Sales s.a. (MoM)
Showed cyclical fluctuations with signs of softening retail sales; Indicating weak domestic demand as the effects of tax rates in 2011-12 started to level off.
Retail Sales Ex Inflation(QoQ)
HSBC Services PMI
A preliminary survey of factory managers
Italian Purchasing Manager Index Services
Germany, France and Italy 3 biggest EU economies. All EU PMI indicate contraction.
French Purchasing Manager Index Services
German Purchasing Manager Index Services
Euro-Zone Purchasing Manager Index Services
Euro-Zone Purchasing Manager Index Composite
Euro-Zone Sentix Investor Confidence
Previously fell to 12/12 level. With the Italian government formation and Cyprus dead, investors’ confidence may improve
Euro-Zone Retail Sales (MoM)
Has improved for 3 months, albeit at a slowing pace.
Euro-Zone Retail Sales (YoY)
Building Permits (MoM)
1Y avg. -0.9; High 17.5; Low –16.5.
Ivey Purchasing Managers Index SA
Survey based on small sample size.
Average Hourly Earnings (QoQ)
Strong kiwi dollar and drought effect have hurt some companies’ revenue, decline in earnings of the country’s largest bank ANZ may weight on wages earnings.
Private Wages ex Overtime (QoQ)
Labor Cost Private Sector (QoQ)
BRC Shop Price Index YoY
Steady uptrend for three months.
AiG Performance of Construction Index
Leading indicator of business activities.
Upcoming Events & Speeches
China Leading Index (MAR)
Fed’s Pianalto Speaks
Asian Fin Mins and Central Bankers Meet for Asian Dev Bank Meet
Russia Updates Wellbeing and Reserve Funds (APR)
OPEC Board of Governors Meeting
Italian PM Letta Speaks in Milan Expo
German Chancellor Merkel Speaks on EU’s Future
ECB’s Draghi Speaks
Italian PM Letta and Spain PM Rajoy Meet
US Senate Holds Final Vote on Online Sales Tax
SUPPORT AND RESISTANCE LEVELS
To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal
To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table
CLASSIC SUPPORT AND RESISTANCE
EMERGING MARKETS 18:00 GMT
SCANDIES CURRENCIES 18:00 GMT
INTRA-DAY PROBABILITY BANDS 18:00 GMT
--- Written by: John Kicklighter, Chief Strategist for DailyFX.com
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