Monday, 15 July 2013

Weekly Excel Markets Review and Preview

Ralph Shell, Excel Analyst

As we have noted (Thursday, July 11), last week was a week when the forex markets were taking their cue from the central bankers.  In the process, the once almighty USD had some weak moments as Bernanke claims the easy money policies are going to remain, probably until well after he leaves office in just seven months.

These comments were well received in the equities markets and most of the Indexes moved into new high ground.  Especially vulnerable were the euro shorts.  The vicious rally in the euro leaves the impression there are some unknown forces supporting the euro.  From our vantage, the market action must be respected even though there are numerous sovereign debt problems in the euro zone that are not being addressed.

Also, the inability of the banks to make loans in much of Southern Europe is curtailing economic activity in the private sector.  Should economic solutions fail to be introduced, the risk is political solutions focused against the austerity administered by the creditor nations in Northern Europe.

We do not want to belabor analysis of the euro - however, the trade has been quite active.  Thursday, the  futures volume at the CME was 379K contracts, preceded by 299K the day before.  The trading well exceeds the outstanding volume of about 223K contracts. (FXE)

One of the currency contracts that has the biggest volume in relation to the underlying economy is the Australian Dollar.  The trading volume Thursday was about 149K, but the open interest is a very large 188K. 

The A$ has been under assault from the bears following the recent rate reduction.  That reduction came after continued evidence the Chinese and the Australian economy is slowing.  This will result in a slowing of the commodity boom that produced a bifurcated Australian economy.  There do not appear to be any dominating Australian numbers coming next week, but there are some Chinese numbers of importance.

Click to Enlarge AUDUSD Weekly Forex Chart

Yesterday, Sunday July 13, we got the Chinese GDP.  The consensus number is a Q/Q gain of 1.75% and a year-on-year gain of 7.5%.  These numbers do reflect a slowing of the Chinese economy, and there are rumors the numbers may come in below the guesses.  A vibrant, growing China is felt to be necessary for strong Australian growth, so a weak number may negatively impact the A$.  (FXA)

But is it wise to get bearish on the A$ here?  The bear market has been with us for weeks.  The weekly RSI at under 21 is well in oversold territory.  The bears have been in charge for quite a while.  Our last COT report showed the bears held over 95K contracts.  Should we get bear numbers from China and the A$ does not break, it may be time for taking a contrarian stand, long the A$. 

The weekly chart in the USDJPY indicates the bear move in the yen has stopped, at least temporarily.  We are not surprised with this action.  The crowd is short the yen, and there is an important election coming up on the 21st.  If Abe wins the election, as expected, we would not be surprised to see a return to the 103 handle, and possibly 108 by year-end.

Click to Enlarge USDJPY Weekly Forex Chart

There are some meaningful US economic reports coming out next week.  Today (Monday July 15), we get US retail sales, expected to be up 0.8% following last months 0.6%.  Excluding autos the numbers are 0.4% preceded by 0.3%.  The Empire Manufacturing Survey is also released that day and is expected to show a decrease to an index of 5, down from 7.84 the preceding month.

Tuesday features the M/M US CPI which is expected to be up 0.2%, the same number as before.  Also released that day is the Net Long Term TIC flows.  This report measures the flow of capital into and out of the US.  It is always interesting to see which way the money is moving.  This, then begs the question, is money moving into the US because is represents and investment or is this scared money seeking a safe haven?

On Wednesday, we get the Housing Permits, estimated at 1000K and the housing starts, 960K.  This is followed on Thursday by the Initial Jobless Claims, estimated to be 340K, and the Philadelphia Fed Business Outlook.  That number is supposed to show a decrease to 7.75, from 12.5 in the prior period.

In each of these reports, we must continually assess when bad news is good news for certain markets.  Will good economic news in the US scare the market into thinking tapering is imminent? 

Personally, I think the US recovery lacks the legs to gather momentum.  Obamacare, and its' complexities, is a drag on hiring, and postponing the employer mandate for a year merely adds to the uncertainty.  Another threat to the US economy is the recent spike in crude oil.  The increase has yet to make it to the gasoline pump but it will be a drag on the economy.  Finally, will the reduction in government spending slow the economy?  For the past several years, state and local governments have been relying on large amounts of federal subsidies to stimulate the economy.  Slow these funds down, and the private sector will be needed to pick up the slack.
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