Aussie

While the sell-side has been vociferous about the fact that earnings are troughing, that consensus growth expectations are not miraculous, that equities are discounting that awesome reality; it appears Goldman Sachs' 'Swirlogram" - which we initially discussed here - is pointing to what we have been seeing for months - a slowdown in their global leading indicator dead-ahead.

An overivew of the price action in the foreign exchange market and what it might mean in the week ahead.  

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As debate about currency wars heats up, there's been little talk about which currencies will prove safe havens. We think the Singapore dollar tops the list.

The G7 issued a statement that essentially endorses stimulative policies in Japan and elsewhere, but reaffirmed its commitment to market determined exchange rates. This is a green light to buy dollars against the yen and to buy euros.

• Pope steps down, citing frailty (Reuters)
• Japan’s economic minister wants Nikkei to surge 17% to 13,000 by March (Japan Times)
• Venezuelan devaluation sparks panic (FT)
• Rajoy releases tax returns, but fails to clear up doubts over Aznar years (El Pais)
• Companies Fret Over Uncertain Outlook (WSJ)
• Home Depot Dumps BlackBerry for iPhone (ATD)
• Kuroda favors Abe's inflation target, mum about BOJ role (Kyodo)
• A Cliff Congress May Go Over (WSJ)
• U.S., Europe Seek to Cool Currency Jitters (WSJ)
• Radical rescue proposed for Cyprus (FT)
• Franc Is Still Overvalued, SNB’s Zurbruegg Tells Aargauer (BBG)
• Northeast Crawls Back to Life After Crippling Blizzard (WSJ)

The markets generate noise and a signal.  Reasonable people can and do differ on which is which.  This brief note address the signals for the yen and euro.  Secondarily it looks at sterling and the Australian dollar. 

Here is a review of the technical condition of the major currencies.  In my professional experience, I know few purist fundamental traders in the foreign exchange market.  Even for those, like myself, who study the macro economic and political fundamentals, technical analysis allows us to quantify the risk. Those who make money in the markets, do not do so because they are right more often, but rather they are disciplined risk managers.  Technical analysis provides a way to manage the risk by helping to identify where we are wrong.    It is offered here not as a substitute for fundamental analysis, but as a complement.  

Here is a weekly over view of the currency market from a technical perspective.  The divergence between the performance of the dollar against the euro-bloc, with the exception of sterling, and the other major currencies is noteworthy.  In the analysis, I suggest a few opportnities for near-term contrarians.  I fully appreciate that some readers eschew technical analysis and regulate it to the same space as numerology and witchcraft.  Yet, even still, it is useful to recall Keynes' view that the markets are like a beauty contest and the trick is not to pick who one thinks is the most beautiful, but to pick who others will think most beautiful.  Moreover, technicals allow one to quantify how much one is willing to lose in a way that fundamental macro-economic analysis doesn't.  It is a tool then for risk management.  

The US dollar is trading firmly. The official verbal commentary this week by Europe's Juncker and Japan's Amari were more disruptive noise a true signal. These mis-directional cues whipsawed short-term participants and served to obscure what was really happening. One of the most important take aways, it seems, from this week's action is the narrowing of the breadth of the dollar's decline. It is really limited to only the euro...

UPDATE: Sure enough - *COLE SAYS MAJORITY OF REPUBLICANS TO VOTE FOR SENATE BILL ... and the market is rallying

Following Monday's fiscal-cliff-gasm in markets in the US, the Australian stock market is the first indication of the post-cliff on-again-off-again reaction to the reality that is a stymied House and stubborn Senate. Some are noting the fact that it is 'up' as a signal of confidence - however, given its 'catch-up' nature, it is actually signalling considerably less confidence than US stocks showed at their close. Why is this important? Because all that matters is the market...

"Everyone knows once the markets open tomorrow our courage drops in direct proportion to the market fall," said one Republican lawmaker

Of course, this could all change based on the next flashing red headline.

The US dollar is sporting a softer profile today.  It had initially extended its gains after recovering in North America yesterday. In Japanese candlestick terms the euro and sterling had recorded "shooting stars", in essence opening on their highs and finishing on their lows.  Additional profit-taking was seen in Asia, earlier today.  The euro was pushed below its 20-day moving average for the first time since Dec 11.  Sterling fared better but still extended yesterday's losses.  However, in the European morning, both currencies have recovered to move back into yesterday's ranges.

The price action can be attributed to thinning market conditions and the recovery of the yen.  Indeed, "sell the rumor buy the fact" gains in the yen, may have pressured the other currencies as cross positions were also unwound.   The dollar has stabilized after slipping through the JPY84.20 area to trade below the previous day's low for the first time since Dec 10. 

Well that did not take long. T+2 days from his re-election, Shinzo Abe has summarily unbudgeted himself. As Kyodo News reports, the sphincterially-challenged wild-man has decided to scrap the country's spending cap for the annual budget. Previously capped at a measly JPY71 trillion (excluding debt-servicing costs) in an effort to create some pretense of fiscal discipline, the new Keynesian has unilaterally decided that moar is better. Not exactly helping, though perhaps exactly what the currency-war-inflaming Abe might like, the trade balance plunged yet again (to -JPY953bn from -JPY540bn) from  - setting a new all-time record negative average as the implicit capital flight continues. JPY weakness has resumed but it is the collapse in JGBs that will be worrying people - the biggest 5-day run-up in 10Y JGB yields in over 13 months.

The US dollar moved lower over the past week against the major currencies, with the notable exception of the Japanese yen.  The greenback's technical tone has deteriorated.  The euro and sterling appear to have convincingly broken above significant down trend lines.  With the holiday season upon us, there seems to be no compelling technical reason not to look for a continuation of dollar weakness into the end of the year.  Few are incentivized to fight the trend.

The extent of the Fed's easing, and the implication of its guidance, suggests an even more dovish posture than the expansion of QE3+ (remember it was purposely open-ended, unlike QE1 and QE2). While the euro zone economy appears to be contracting this quarter at a slightly faster pace than in Q3, the slowdown in the US is more dramatic.  Growth may be more than cut in half from the 2.7% annual pace seen in Q3.   The fiscal cliff is the main cause of consternation at the moment.  Although there is private negotiations taking place, the public posturing is what investors have to guide them, and it is not particularly flattering.

After extending recent losses in Asia, the US dollar stabilized in the European morning.