Dollar Firmer After Dovish ECB Comments

Originally published by AxiTrader

Key Takeaway

Brexit has been triggered but the pound and FTSE 100 survived day one intact on what has been a fairly positive night’s trade across stocks markets.

It’s central bank speak which has been most interesting with Boston Fed’s Eric Rosengren saying he thinks 3 more hikes this year should be the Fed’s base case. That’s neatly juxtaposed with “sources” at the ECB telling Reuters markets are overreading any intention to move rates in Europe anytime soon.

Naturally that’s seen the euro come under a little pressure which has helped the US Dollar Index rally back above 100. It hasn’t moved much against the yen, the pound travelled through a 100 point range but is largely unchanged now and the Aussie and EM currenices are benefitting from the overall benign tone and lift in risk appetite.

On commodity markets oil is up sharply on the back of encouraging inventory news – especially in gasoline. Gold is becalmed, and copper is trying to break higher.

What You Need To Know (with a little more detail and a few charts)

• S&P 500 +3 (0.14%) 2362 (7.00 am Sydney)
• Dow Jones Industrial Average -47 (0.23%) 20656
• Nasdaq 100 +24 (0.4%) 5,898
• SPI 200 +4 (0.07%) 5,864
• AUD/USD 0.7669 +0.46%
• Gold $1253 +0.12%
• WTI Oil $49.40 +2.15%

International

• “There is no reason to pretend this is a happy day”.

• So said EC president Donald Tusk last night as he received the letter from a representative of British PM Theresa May to official trigger Article 50 and begin the process of the UK’s withdrawal from the EU. It was a longish letter setting out what HM Government is seeking to achieve as it exits the EU.

• The potential wrinkle in the process was there for all to see who read May’s letter. What’s clear is that Britain is seeking to both withdraw from the EU but also negotiate a special relationship with the EU – “cake and eat it” as they say. But German chancellor Angela Merkel seemed to put the kibosh on that idea saying that while she would certainly be looking for “fair and constructive” talks any future deals would come after the negotiations to leave had been done.

• “Britain and the EU, including Germany, have become closely entwined over years of membership…In the talks we must clarify how these close ties can be untangled. We must deal with many rights and obligations that have been linked to membership. Only then, later, can we talk about our future relationship” Merkel said (my emphasis).

• Now there was no reason why the day Article 50 was triggered should have caused ructions in EU or UK markets, or currencies. But there is plenty of room for the desire of Britain to negotiate the twin streams of the EU exit and the relationship afterward to butt up against the EU’s desire to keep negotiations separate. The EU will still want good relations with Britain. But there is absolutely no appetite to smooth the process for the UK in such a manner as to incentivise European populists to campaign on leaving the EU. I note that because that divergence in motivation creates room for conflict and market and economic ructions. But that is for another day.

• Before I leave Europe though it’s worth noting the polls still say Macron will beat le Pen easily in a run off election. And last night he attracted the support of noted socialist, and former prime minister Manuel Valls. Naturally that has infuriated the Socialists and its also left Macron a little nonplussed. Bt it’s another sign of how the rest of France – if I can put it that way – is set to line up behind whoever faces off against Marine Le Pen.

• The message from the Fed is loud and clear. The unanimity of view that rates will be rising in the US continues. Over the past few day’s we have heard from Fed vice-chair Stanley Fischer, Dallas Fed’s Robert Kaplan, Chicago Fed’s Charles Evans, Fed Governor Jerome Powell, and Boston Fed president Eric Rosengren who all said rates will be rising at least another couple of times this year.

• But in a speech last night Rosengren said there should be an additional rate hike meaning the Fed would tighten at “every other meeting” this year as long as the economy moves the way it is looking at the moment.

• “Importantly, this would still be a fully data-dependent approach, not a preset path, as it would hinge on the incoming data — but the base case would be four tightenings, reflecting the strength of the economy that I believe justifies more regular normalization of interest rates,” Rosengren said (my emphasis). I find it hard to disagree with him.

• Oh and as I was about to sign off – John Williams from the San Franscisco Fed has said this morning that we should be surprised if there are more than three hikes in 2017. Don’t rule it out is what he actually said.

• On the other side of the Atlantic the ECB appears to be back tracking from the more hawkish message that seemed to be coming from it and it’s operatives. As I noted yesterday the ECB’s Smets (and Mcafferty from the BoE) had sought to highlight the “hawks’ were in the minority. And last night claiming an exclusive Reuters reported that “One ECB source said the bank has been overinterpreted by markets at its March 9 meeting”. The source said that “we wanted to communicate reduced tail risk but the market took it as a step to the exit…the message was way overinterpreted." European bonds rallied as a result.

• A Chinese government think tank said yesterday that Q1 growth is likely to print a robust 6.8%. Reuters reported “The National Academy of Economic Strategy attributed the first-quarter expansion to a strong rise in factory-gate prices, rebounding corporate profits and increasing imports, Xinhua said.”

• The Bank of Portugal has upgraded its economic growth forecasts for 2017 and 2018

• The Thai central bank held rates steady but has upgraded it’s economic forecast for this year.

Reflation is real folks – across the globe. As I keep writing stocks rally is not just about the hope of Trumponomics

Australia

• Another big surge on the S&P/ASX 200 yesterday added 52 points and took the index to a close at 5,873. That’s the highest close since April 28 2015. Again the banks and the financial sector was the big driver of the move. That the banks have been able to move rates higher outside the RBA has been a positive for that sectors profitability in the absence of a credit event many analysts are now saying. But there is also much chatter about M&A in the markets right now. That suggests that even at these levels in index terms companies and investors see value at a stock specific level. That’s instructive about the potential for further gains in the market.

• But it’s happened again. For what seems like the gazillionith time the under performance of the local market relative to the moves in the US – in a linear sense at least – has been remedied with this stellar rally over the past few days. You can see it clearly in the chart below. What that suggests is that the Aussie market probably needs the US market to kick on to drive it materially higher.

• But it is month and quarter end. So it’s possible shenanigans time when it comes to valuations meaning the rally may not be over yet. Futures traders are a little circumspect with only a 7 point rise priced into the SPI from where we were yesterday afternoon. The top of the current upchannel comes in at 5904 this week.

• HIA new home sales is the only data on the day. So it’s money flows and month end moves which will dominate trade again today.

Forex

• The pound fell to the 1.2380 region I highlighted in yesterday’s video making a low of 1.2377 before bouncing roughly 100 points to 1.2476 and then drifting back to 1.2415 where it sits this morning. That suggests there are sellers lurking overhead. But it is worth noting it is very early in the process and the big speculators are very, very, short sterling at the moment.

• That might help explain why the pound – with a loss of 0.26% day on day – is outperforming the euro which has lost 0.57% to 1.0750. Naturally I’ll say it’s because the euro failed at the 200 day moving average a couple of nights ago but more importantly it’s because the ECB is apparently trying to signal that the market misread it’s intentions on monetary policy as noted above.

• The key in the short term is that the EUR/USD has broken the short term uptrend and is sitting on the 38.2% retracement of that rally which comes in at 1.0740/45. A break would suggest a further 50 point fall to the 50% retracement level around 1.0690. Central bank policy matters so when you see what the ECB said versus the Fed speakers – especially Rosengren – such a move is possible. Here’s the euro chart.

• USD/JPY is sitting at 111.02 this morning down marginally on the day. It’s still below the bottom of the recent range and would need to trade above 111.50/55 for the outlook to brighten materially for the dollar and confirm it had broken back inside that range.

• The Australian dollar hasn’t quite made it to the 0.7680/90 region I talked about in my video and Ausie dollar specific piece yesterday - but it’s almost there at 0.7670ish this morning. As I noted in those for a as counterintuitive as it may seem what’s good for the US dollar at the moment is also positive for the Australian dollar. With copper, base metals more broadly, and iron ore higher, and with overall risk appetitie a little more elevated the Aussie could still head into this region. A break of 0.7690 is necessary however to open up another run at 0.7740ish. Would the bulls dare though?

• As the Aussie dollar benefits so to are EM currencies. In particular the Mexican peso has gained 1.4% and is back at 18.75. The Brazilian, Columbian, Chilean, and Korean currencies – among others – are also stronger this morning. What’s good for risk appetite and the US dollar isn’t hurt these currencies right now.

Commodities

• A smaller than expected increase in crude oil inventories aand a much larger than expected draw in US gasoline stocks put a bid under global oil prices again overnight. The EIA said that crude stocks rose 867,000 against expectations of a build of 1.4 million. But it was the draw of 3.7 million barrels of gasoline against expectations of a 1.9 million fall in stockpiles which traders are taking as evidence that demand is looking stronger again.

• Naturally that will help expectations of a rebalance in the overall oil market. On that note a Reuters survey showed compliance in OPEC is up to 95 of the agreed cuts as the Saudis wind back their overcompliance as other nations come up to speed with their own cuts. But with stocks still elevated the prospects of a move toward an elongated production cut to underpin the rebalancing are still occupying traders – and naturally many producers minds.

• But this morning we have WTI up 2.17% sitting at $49.42, just 20 cents below the recent high. Brent is up at $52.32 for a rise of 1.9%. My system is now long WTI after the price broke the previous day’s high. But there is overhead trendline resistance around $49.80 and then the $50.20/50 region could be tough. Here’s the chart.

• Gold is doing little but looking cautious at $1251 while copper is fairly quiet at $2.67. It’s breaking out of the downtrend from the $2.82 high but hasn’t taken out the high for the month just yet. I’s need to see it trade above that high of $2.6870 before I got too excited.

Have a great day's trading.