Australian Dollar

An overview of the technical condition of the major currencies. See why we anticipate a heavier US dollar in the week ahead.

The Cyprus finance minister Michael Sarris may or may not have submitted his resignation after the president formally declined to accept it, but now that he is back on the saddle he is back to spreading hope, cheer and goodwill. Those wondering why both the EURUSD, and its derivative, US stock futures have surged overnight and retraced all of yesterday's losses and then some, it is not due to any anachronistic events such as "good economic news" (especially since the Spanish PM said Spain will have to cut its economic outlook once again, or rather, as usual), but due to the following phrase uttered by Sarris a few hours ago: "We are hoping for a good outcome, but we cannot really predict" regarding his views on talks with Russia. That's right - the entire overnight ramp is based on the hope of one man, who thinks Russia can be blackmailed through deposit haircuts, into bailing out the tiny island which has now said nein to Europe and bet the ranch on a well-meaning Vladimir Putin. What can possibly go wrong: according to the GETCO algos all alone in levitating stocks, absolutely nothing. What is clear is that Cyprus is fully intent on seeing Europe "blink" whether due to Russia's involvement or just because it thinks (correctly) it has all the leverage as the alternative is a breakdown of the Eurozone.

Not even the usual monthly futures panacea (which in fact manages to fool the entire centrally-planned market twice every month, all the time), the always rising German ZEW Economic Sentiment survey, which mysteriously did not come at an all time high, but still rose from February's 48.2 to 48.5, despite expectations of a decline to 48.1, has managed to push the EUR higher in overnight trading, as a result keeping a lid on any of the generic no-volume futures levitation we have all grown to love. The reason is not that concurrently with the German data we got abysmal Eurozone Construction Output data, which plunged -7.3% Y/Y, the most in four months, following a slump in French and Spanish activity offsetting the German "confidence-boosting economic miracle" but simply because there continues to be no clarity whatsoever on events in Cyprus, where as noted earlier, the parliament may vote as soon as 6 hours from now to veto the proposed deposit confiscation "bailout/in" plan, which could lead to the first Eurozone banking system collapse, and the first expulsion of a member Eurozone nation, setting the wheels in motion for the unthinkable.

An update on Cyprus and what else the week has in store.

A weekly overview of the technical condition of a number of currencies against the US dollar. It is meant to compliment and supplement fundamental analysis. We retain a mostly favorable outlook for the US dollar, though skeptical of the scope for additional significant gains against the Japanese yen.

Here is a quick overview of what is going on. Besides reviewing the key developments, we explain why the EU Summit, which is not attracting much attention, is in fact important.

A 2-minute read on developments in the global capital markets. Equity markets are heavy, bonds little changed as is the dollar. Sterling is the big winner on short covering and bottom picking.

The US dollar rose to new multi-month highs against several of the major currencies, including the euro, Swiss franc, British pound and the Japanese yen.  The BOJ, BOE and ECB meet last week and none changed policy.  The Swiss National Bank meets on March 14 and is also unlikely to change policy.  The Federal Reserve meets the following week and is widely expected to stay its course.  It is not monetary policy then providing the new trading incentives. 

Nor can the dollar's gains be attributed to political uncertainty in Europe stemming from the inconclusive Italian elections, as was the case previously.   The immediate shock has worn off and Italian stocks and bonds have recovered the lion's share of those initial losses. 

Earlier we reviewed the overnight plunge in China stocks, especially those related to the real-estate market in the aftermath of the latest move by the State Council to be far more hawkish than expected, in its effort to curb property inflation. The economic and market weakness that resulted has followed through to overnight US and European futures, even as peripheral bonds are trading roughly unchanged, surprising many who thought this weekend's Beppe Grillo statement on the future of Italian debt and presence in the Eurozone would be market moving: it wasn't as Grillo said nothing that he had not already made quite clear. In other, more recent economic news, UK construction PMI imploded to recession levels, plunging to 46.8 from 49.0, far below expectations and the lowest print since October 2009, setting the stage for much more Goldman-led reflation by the BOE. Also negative was the drop in the Eurozone Sentix Investor Confidence index which tumbled to -10.6 from -3.9 on expectations of -4.3, sending the EURUSD deep into 1.29 territory. It appears the Sentix excludes the soaring German confidence, which two weeks ago was the sole driver of all upside, not once but twice in one week. Today we get the first day of the sequester being digested by the market - this togetger with an empty macro calendar in the US means rumors and headlines will determine how far GETCO's algo push the stop hunts during the first and last 30 minutes of trading.

The week ahead promises to be eventful. Three main items stand out: service sector purchasing managers surveys, five major central bank meetings, and the US employment data.

As we have been warning for nearly a year, the biggest threat facing China has been the fact that contrary to solemn promises, the problem of persistent, strong and very much relentless real-estate inflation has not only not been tamed but has been first and foremost on the minds of both the PBOC and the local government. After all with the entire "developed" world flooding the market every single day with countless billions in new cheap, hot money, it was inevitable that much of it would end up in the mainland Chinese real estate market. And since both the central bank and the politburo are well aware that the path from property inflation to broad price hikes, including the all critical to social stability pork and other food, is very short, it was inevitable that the issue of inflation would have to be dealt with eventually. Tonight is that "eventually", when following news from two days ago that yet another Chinese PMI indicator missed, this time the Services data which slid from 56.2 to 54.5, the government announced its most aggressive round of property curbs yet. The immediate result was that the Shanghai Stock Exchange Property Index slumped by a whopping 9.3%, the steepest drop since June 2008, and pushing it down to -11% for the year. The weakness also spread to the broader market, with the Composite closing down 3.65% the biggest drop in months, and now just barely positive, at +0.2%, year to date. We expect all 2013 gains to be promptly wiped out when tonight's risk off session resumes in earnest.

Overview of the drivers of the fx market, a discussion of the price action and a review of the latest Commitment of Traders report from the futures market.  Contrary to ideas that QE3+ is the dominant force and dollar negative, the net speculative position is now long dollars against all the major currency futures but the Australian dollar and Mexican peso.  The dollar's gains though appear to be a function of events outside the US.  

Instead of looking at the daily bar charts for the major currencies that we provide every week, given the large moves, we thought it might be helpful to look at the longer term charts.  It is one thing for pundits and other observers to argue that QE drives currencies down, it quite another to operationalize and use that as a decision-making rule for investing or trading the foreign currencies.  The way people make money in the markets is not being right more often, but disciplined risk management.  Technicals allow one to quantify risk and admit where one can be wrong.  

Today's drivers and their implications.

Every voice in the FOMC minutes is not a voting member. Bernanke, Yellen, Dudley are the keys and they are committed to QE. That is a descriptive claim not normative. Debt market has shown little reaction to FOMC minutes compared with the dollar and stocks. PBOC drained, but did not really tighten monetary policy. Euro zone PMI poor and gap between Germany and France grows. And what's up with Abe's trip to the US ?