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US Dollar Driven Higher

Marc To Market's picture




 

US dollar gains have been extended for the third session.  The euro has been sold down to almost $.1.30 after testing $1.33 on Wed.  More stale longs may be forced out on a break of $1.2985, which corresponds to a 50% retracement of the advance from the mid-Nov low near $1.2660 and the 50-day moving average.

Sterling's decline is even more dramatic.  It has come off hard since setting a 17-month high on Wed near $1.6380.  It has now been pushed below $1.6040, which the 61.8% retracement of its rally from mid-Nov low near $1.5830.  Sterling has also slipped below the 50 and 100-day moving averages for the first time in seven weeks.

The main data in Europe was the service sector PMI.  The headline confirmed the five month high of  the 47.8 flash reading.  However, both the German and French reading came in below their flash reports.  Germany at 52.0 rather than 52.1 and France at 45.2 rather than 46.0.  The counter-balancing upside surprises came from Italy (45.6 up from 44.6 in Nov and 45.0 expected) and Spain (44.3 from 42.4 and forecasts of 42.8).  Yet even this should be kept in perspective.   Spain and Italy headline service PMI have not been above the 50 boom/bust level for more than a year.

The UK's CIPS service PMI was as large a disappointment as the manufacturing PMI earlier in the week was a pleasant surprise.  The 48.9 reading contrasts with forecasts for 50.5 and the 50.2 reading in Nov.  It is the fourth consecutive month in which the headline has been lower.  New business is at a two year low.  The risk is that after the expansion in Q3, the UK economy contracted anew in Q4.   At the same time, preliminary reports suggest the funding for lending scheme is easing the supply of credit and fear that the UK suffers from weak productivity more than the lack of aggregate demand (which could make further easing more inflationary than stimuluative, a la the BOE's Weale) means that there is unlikely to be a policy response to the new evidence of economic weakness.

Meanwhile, the greenback has pushed to new highs against the yen, moving above the JPY88 level in late Asia and holding above it in the European morning.   The Nikkei re-opened for the first time in the new year to post a strong 2.8% gain.  Japanese government bonds slumped with the 10-year yield rising almost 4 bp to 0.825%, the highest level in more than three months.

The 30-year bond yield rose to almost 2%, its highest level in more than a year.  Yet, given the magnitude of the yen's decline and prospect for more to come, and the policy thrust of the new government, it is surprising yields have not risen more.   Japan will auction a total of JPY3 trillion of 10- and 30-year bonds next week and some of the weakness today may be related to deal position adjusting

Many market participants seemed to emphasize the wrong part of the FOMC minutes.  The key take away is not that there is some disagreement among the members about the duration of QE.   Instead, the key point is that the Fed is committed to expanding its balance sheet by buying more than $1 trillion of MBS and Treasuries in 2013 ($85 bln a month).  We note that from the Fed's perspective, the stock of its holdings of long-term assets is the key to its effective not the flow of purchases.

Moreover, its macro-economic guidance indicates that in will not raise interest rates until after unemployment falls below 6.5%, provided core PCE stays below 2.5%.   Plugging these macro-economic conditions into a Taylor-like model underscores the dovishness of the Federal Reserve.  On top of that, the composition of the FOMC, with new regional presidents rotating, tilts a bit more in the dovish direction.

The economic highlight of the day is the US jobs report.  In addition to the usual acknowledgements that this is among the most difficult high frequency data points to forecast, we share the following observations:  1) Many revised up their estimates following the stronger than expected ADP report.  This means the 150k consensus is probably on the low side of expectations 2) Initial jobless claims during the survey period were a little higher and small business survey was cautious.  ISM for manufacturing rose back above 50.   3) ADP is not a good predictor on a monthly basis, though it tracks trends fairly well. 4) This is especially true for the month of December, where ADP has over-stated the first BLS estimate by an average of almost 150k in the past two years.  5) Uncertainty surrounding the fiscal cliff did not seem to weigh on hiring decisions.  Private sector job growth in in the Sept-Nov period was essentially no different than the prior three month period.  6) Net private sector job growth averaged about 151.5k in the first eleven months of 2012.  This compares with 153k monthly average in 2011.

 

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Fri, 01/04/2013 - 12:21 | 3122289 MrBoompi
MrBoompi's picture

The dollars up?  Great!  Now we can devalue it a little faster in the race to the bottom.  And of course gold is down, which any stacker worth his weight will take advantage of.  The markets seem like they're on autopilot, but I'm Congress can fuck that up in a hurry.

Fri, 01/04/2013 - 09:10 | 3121526 new game
new game's picture

pick the pockets of the confussed-never underestimate the cartel king pins..

fed partners will be picking your pockets if you don't take a break...

sidelines for me-i am somewhat clueles as to where this is going s.t.

certainly a cost averaging pm opp.

Fri, 01/04/2013 - 09:04 | 3121519 Marc To Market
Marc To Market's picture

Psst  gold is an asset not money in the major industrialized countries. 

Fri, 01/04/2013 - 11:57 | 3122155 Attitude_Check
Attitude_Check's picture

PSSSST is in considered so by fiat.

Fri, 01/04/2013 - 11:39 | 3122081 fuu
fuu's picture

"I am the global head of currency strategy at Brown Brothers Harriman."

Yeah well fuck you too.

Fri, 01/04/2013 - 14:20 | 3122914 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Lol brown brothers Harriman. Those fuckers handled Nazi money.

Fri, 01/04/2013 - 09:12 | 3121534 Orly
Orly's picture

Marc, Marc, Marc...

Please don't tell them that.  The vehemence with which you will be called every name under the sun and your father's integrity impugned knows no bounds with the gold-bug types.

It is best to just smile and nod and think, "Okay, man.  Whatever..."

That way, we can keep at least one post line on ZeroHedge relatively clean of the flutter and clutter of all gold, all the time.

:D

Fri, 01/04/2013 - 11:38 | 3122074 fuu
fuu's picture

Hypocrite.

Fri, 01/04/2013 - 09:19 | 3121552 Marc To Market
Marc To Market's picture

yes, you're right.  For me, the euro and sterling had been rallying since mid-Nov in anticipation that a fiscal cliff deal would be made.  It was.  I am surprised by the pace of the correction, but there does seem to be a market-logi, no ?  Difficult to trade perhaps.  This is why money management often trumps "being right" if the goal is to make money rather than entertainment.  I want to see what happens near $1.2980 in the euro and JPY90.  

Fri, 01/04/2013 - 12:07 | 3121699 LawsofPhysics
LawsofPhysics's picture

I'd argue gold is also a pretty safe store of value in the long run.  Unlike other commodities that tarnish or rot, gold is pretty inert.  With this many exponential equations at work, time can really speed up too.  With a dollar cost average of under $300 on my holdings, all you junkers can go fuck youself (turns out buying gold on those dips in the 90's really was an investment after all).

Fri, 01/04/2013 - 14:19 | 3122905 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

They're just jealous they missed the buy and hold trade of the decade.

Fri, 01/04/2013 - 09:08 | 3121525 Enslavethechild...
EnslavethechildrenforBen's picture

Couterfeit paper is not real money in any country bitch.

Fri, 01/04/2013 - 09:19 | 3121551 Orly
Orly's picture

Seriously?  You have to come into a 4X thread and start with that nonsense?

You obviously have no idea whom you're talking to and no clue whatsoever as to what you're talking about.  It's like vermin, man.  A fekkin' disease.  Gold bugitis.

Take your gold somewhere else and your nasty attitude with it.  It's disgusting!  Do you talk to your daughter like that?

You should be ashamed, every last one of you.  You all apparently have the combined IQ of a phone book.  Just shut up already.

Fri, 01/04/2013 - 10:23 | 3121743 unplugged
unplugged's picture

"You should be ashamed, every last one of you.  You all apparently have the combined IQ of a phone book.  Just shut up already."

Ok Orly old paper syndicate boy, us mowrons got some questions for you since you are sooo smart:

1) what is the average lifespan of a fiat currency ?

2) what is the longest lifespan a fiat currency has ever had ?

3) what are the definitions of "currency" and "money" ?

4) is gold more like "currency" or "money" ?

Thanks in advance for your wisdom - us mowrons are eee-gerly awaiting your answers.

Contrarily, us mowrons don't much appreciate that you paper syndicate fraud-hucksters have fucked up beyond all recognition the global financial system and pissed on the U.S. Constitution and therefore the USA by either unknowingly or willfully promoting paper over metal in the trading games you play, be it 4X, 4play, or whatever fucking circle jerk shit you do.

 

 

Fri, 01/04/2013 - 10:46 | 3121832 Orly
Orly's picture

Ah!  4play.  I get it!  Ha!

Very, very clever.  They teach you that at day camp?

 

 

 

idiot.

Fri, 01/04/2013 - 14:16 | 3122889 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Gold meets all definitions of money, something FX does not, because money, by definition, must "store wealth".

Fri, 01/04/2013 - 11:53 | 3122141 Attitude_Check
Attitude_Check's picture

Well hey suuuuper genius,  I notice you didn't address any of his questions?  is it because you don't understand -- or because you do, and prefer misdirection?  You realize that spouting nonsense like this demeans all of your other posts, and opinions as the rantings of someone with bigger reality issues than the gold-is-money crowd.

Fri, 01/04/2013 - 09:02 | 3121516 Orly
Orly's picture

The price action in the first trading days of 2013 has been very strange.  When the SPX went ballistic following the fiscal cliff, the Euro actually went in a reversal mode.  This was followed by a sell-off of GBP. The past couple of years has all these interests acting in lock-step.  Why the change?

Was it year-end repatriation of Euros?  A re-balancing of books for the New Year?  Or does this mark a point when the Euro will be allowed to float lower into dollar strength?

Since fundamentaal and technical analysis have no real answers for me on this question (everything is broken...), I have the feeling that the latest move in the Euro has amounted to one giant stop-hunt to goose the longs for another ramp up.  The Cable could visit a 50% retracement of the monumental moves in 2008 and reach a lofty target of 1.74, as a break-out set-up is possible as seen on the Weekly chart.

Very, very strange.  It has me confused.

:/

Fri, 01/04/2013 - 18:31 | 3124055 tooktheredpill
tooktheredpill's picture

1.74 for cable? That's ballsy considering a probable triple dip and Europe being mutton dressed up as lamb in the bond markets.

Fri, 01/04/2013 - 10:25 | 3121752 fonzannoon
fonzannoon's picture

Orly this may sound totally ignorant but maybe the best way to view this is to see where they have to cap things? I don't know what the caps are but my guesses are the 10yr is capped at around 2.3%. The Euro/USD is capped at around 1.35%. If you go any higher on the ten year you risk sparking an actual selloff. If you go any higher on the Euro then Europe falls apart.

With the debt ceiling coming and earnings going to suck I think the Euro heads back towards 1.27 and the S&P heads back to 1400 the next few weeks. The ten year is the wild card but my guess is it does not pop it's head through 2% and starts heading back to 1.65%

These are total guesses. I have no analysis to back them up. What do you think?

Fri, 01/04/2013 - 10:44 | 3121818 Orly
Orly's picture

Your ideas will mostly affect the USDJPY pair and hence the yen crosses as well because the level of the USDJPY has been dependent on the JGB/USGBond spread.

The game now seems to be to get the USDJPY to the 90-level and try to hold it, which would indicate that yields on the US 10-year note actually rise or stay relatively static at this level.

In order for the SPX to take a dip and the Euro to slide as well, these would give way the USD strength and US Treasury strength.  With that, yields would fall and that is where the quandary lies because that would mean the USDJPY pair would also slide, perhaps by a lot.

It seems like it will be one or the other because they can't have their cake and eat it, too.  I'm with Marc in that these 4X levels are going to be interesting to watch.  If something trips the wire, we could be in for some really, really big moves in currencies over the next few weeks and months.  It is going to be more fascinating to see how equity markets react, as this next slide down, if it's a big one, will have every mom and pop cleaning out their 401s.  They're already walking on eggshells about this "market," and I can't say that I blame them.

:D

Fri, 01/04/2013 - 10:55 | 3121846 fonzannoon
fonzannoon's picture

I know  alot of people that shifted their 401's heavily into bonds pre cliff. I wonder if that fed release yesterday and this little bond burp was meant to nudge that money back into equities. Throw in the money market situation in the next few months when they break the buck and it reeks of them shoving money into equities.

I have no idea how your are able to evaluate USDJPY when Ben has been simultaneosly tacking on a trillion this year and talking it down at the same time. I know that Abe talked a big game but has he actually hit the gas yet?

Fri, 01/04/2013 - 11:33 | 3122044 Orly
Orly's picture

He's got concessions from the BoJ that monetary easing is coming big-time.  In April, he gets to replace Governor Shirakawa with someone more "friendly" to his printing schemes.

The problem is that just about all they have left is to buy stocks outright in the market, trying to wing the "wealth effect" on the unsuspecting Japanese...being that the ploy worked so well over here. :/

April is a long way off and most traders are conceding that the USDJPY hits 90.  So, we just sit and wait for four months until that happens?  Does something else happen, like another war?  A Greek default?  Five months is like eternity on the foreign exchange, so something is bound to happen between then and now...like maybe the market will come to realise just how impotent the Japanaese Prime Minister is in the face of deflation.

This is going to be a very interesting year, to say the least.

Fri, 01/04/2013 - 10:20 | 3121727 tetsujin
tetsujin's picture

EUR is holding (at this point) on weekly support, 8DEMA. see where it closes by closes of NY. I think it's just an odd week/choppy markets with a public holidays etc

Fri, 01/04/2013 - 09:07 | 3121523 Navymugsy
Navymugsy's picture

A huge move up for EUR will hurt me short term as I live in the EU but I'm paid in dollars. In the long term it would be helpful by sending metals back up as dollar deflates. Rock, meet Mr. hard place :(

Fri, 01/04/2013 - 08:45 | 3121497 new game
new game's picture

markets are rightfully confussed.

shifting winds, lies, planning gone awry, market forces/unintended conseq. you fucking name it- a fucking mess...

Fri, 01/04/2013 - 08:41 | 3121491 new game
new game's picture

they are ass tight to the fucking corner with zero options...

dumb mf'g princeton dr.

Fri, 01/04/2013 - 08:29 | 3121476 Navymugsy
Navymugsy's picture

Seems that the metals are selling off on the fantasy that QE will somehow be stopping soon. I wonder if this is somebody shaking the tree to get the longs out and buy au/ag on the cheap?

Fri, 01/04/2013 - 11:55 | 3122152 Attitude_Check
Attitude_Check's picture

The FOMC minutes say that they are still on track to add $1T this year to the balance sheet.  The question is how long it will continue.  Pay attention to the donout not the hole.

Fri, 01/04/2013 - 08:36 | 3121484 HomeBrewPrepper
HomeBrewPrepper's picture

I don't get why they are selling off either. Just because the fed said they will stop QE. Yeah right. Nothing will change as long as entitlements don't change. I'm buying JM and selling calls

Fri, 01/04/2013 - 09:11 | 3121529 Enslavethechild...
EnslavethechildrenforBen's picture

Everything is exactly as planned.

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