Friday was a case of another day, another US Dollar slide (plus new record closing highs for the Dow, the S&P500 and NASDAQ, but that almost goes without saying these days). The week’s glamour stat., US December CPI showed core inflation rising at a higher than expected 0.3% on the month and 1.8% year-on-year from 1.7%, but you would never have guessed that from just looking at the price action across currencies, stocks and bonds. Note too that US Retail Sales came in a fair bit stronger than expected once accounting for upward revisions to November. Headline sales printed 0.4% against 0.5% expected while November was revised up by 1/10%. But there were much bigger upward revisions to the core measures – ex autos, ex-autos and gas and most important the ‘’control group’’ that feeds the non-auto consumption component of GDP. October control group sales is now put at 1.4% not 0.8% and alongside December’s 0.3% rise was instrumental in the Atlanta Fed lifting its latest Q4 GDPNow estimate to 3.3% from 2.8%.
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For anyone following my Platinum Service it lost 192 points on Friday and is now down 92 points for the month of January, having made 946 points in December, 823 points in November and 657 points in October. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points.
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In truth US Dollar weakness had more to do with independent strength for the Euro and Sterling, the former on news that Angela Merkel’s CDU and Martin Schulz’s SPD had made an outline agreement on forming another German Grand Coalition, and the latter on reports that the Spanish and Dutch Finance ministers were said to favour a soft Brexit that kept Britain as close to the EU as possible.
10 year Treasuries finished Friday pretty much at the same level as prior to the data (~2.55%) having initially spiked to 2.59%. 2s fell back to just beneath 2%, having earlier hit 2.02% and the first time above 2% since early October 2008.
Ongoing poor US Dollar price action meant that the narrow DXY Index has now taken out its 2016 lows (from 8th September, the same day that AUD/USD peaked at 0.8125). At 90.97, it closed at the lowest levels since December 31st 2014. The broader BBDXY index is still 0.5% or so above its September 2017 low. It should not though be too far behind DXY in making new post-2014 lows.
USD weakness meant AUD/USD finally made mincemeat of the 0.7880-90 resistance area that had been functioning at mid-week, to a high of 0.7922 and close of 0.7917, the latter the highest since September 26th. In terms of Fibonacci retracement levels , AUD/USD has now recouped more than 61.8% of the September-December decline and it has to be expected that we will retest 0.80 sooner rather than later and if so then quite possibly the 0.8125 2017 high.
There were significant comments from Boston Fed President Eric Rosengren on Friday, who is proving to be one of the leading lights advocating changes to the Fed’s self-imposed 2% ‘’point’’ inflation target, and who of late has been advocating four Fed rates rises this year versus the Fed’s median ‘’dot’’ forecast suggesting three. Rosengren said the recent drop in U.S. Unemployment could spark a surge in inflation that, given the Federal Reserve’s current policy framework, could trigger interest-rate hikes that bring on a recession. ‘’ I am disagreeing with that framework’’ Rosengren said, referring to the Fed’s ‘’balanced’’ approach to achieving a 2-percent inflation target and full employment. ‘’My concern is if we get too far away from where we want to be on a sustainable Unemployment rate, and we use this current framework, we will get to a situation where we have to raise rates fast enough that we will actually find it very difficult to get back to full employment without causing a recession’’. Rosengren suggests replacing the 2-percent inflation target with a target range for inflation of between 1.5 percent and 3 percent, in line with actual experience over the last 20 years. Under current conditions of low productivity and labor force growth, he said, the Fed would target inflation at the upper end of that range, and would be more patient with rate hikes.
How this debate (and inflation) evolves once Jay Powell takes the Fed reins in February is a big deal for how the US Dollar – already through the 2016 lows in narrow (DXY) Index terms – behaves this year. In particular, adoption of a target range for inflation and lengthy tolerance of inflation above 2% will imply real US rates will be falling not rising even as the Fed proceeds with gradual policy tightening. This would almost certainly be US Dollar negative. Added to this is the emerging debate about the USD implications of rising US twin deficits post December’’s tax deal that is slated to add up to $1.5tn. to deficits in the coming decade.
On the European rates sides, Bundesbank President Jens Weidmann helped bring Bund yields down in late trade on Friday. Though Weidmann reiterated that he thought a firm end date for ECB QE was justified, he played down the chances of an imminent interest rate rise. ‘’It would be particularly stressful for the banks if the long period of low interest rates were to be ended by a rapid, sharp increase in interest rates,’’ said Mr Weidmann. ‘’As far as central bank rates in the Euro area are concerned, however, the immediate risk of change is currently low’’ This is almost funny (and very far from ‘’dovish’’) in so far as no-one thinks the ECB had any intention of rates this side of QE ending, notwithstanding the shifting tone evident in last Thursday’s December ECB minutes.
Weidmann’s comments failed to prevent the Euro being the strongest G10 currency Friday thanks to the German political news, up 1.41% to 1.2202, its best since late December 2014, closely followed by GBP/USD, up 1.40% to $1.3728 and its best level since the day the Brexit referendum result was known. As well as the aforementioned ‘’oft Brexit’’ news headlines, rumblings about a possible 2nd referendum once the terms of Brexit are known (or indeed if there is ‘’no deal’’) continue be heard. It has to still be a long odds bet, though the Guardian penned a good piece on this over the weekend if you are interested:
Also released late Friday in China were the December credit and Money Supply data. These came in a fair bit weaker than expected and versus November, in particular Yuan loans at CNY584.4bn down from CNY1,000bn. expected and CNY1,120bn last time. Broader Aggregate Social Financing was CNY1,140bn (1,500.0bn expected and down from 1,598.2bn) while M2 money supply growth contracted to 8.2% from 9.1% and against expectations for a rise to 9.2%.
Together with Friday’s weaker December import figures, evidence of further tightening in financial conditions should lead to further questioning of the sustainability of the recent strong run up in commodity prices. The latter were mostly firm again mixed Friday, oil up another 50-60 cents (though Brent still shy of a close above $70); gold up $12 and the LMEX index +0.2%, though iron ore lost 30 cents to $77.37.
This morning on the Economic Front we have no Economic data of note from either side of the Atlantic. Remember all US Markets are closed today for the Martin Luther King Holiday with the Futures Markets only opened for a limited time.
March S&P 500
The S&P has now reached my initial target of 2795 and is closing in on my ultimate sell target level from 2803/2816. Unfortunately, despite moving my buy level higher over the past few days I have been unable to set up any long positions and I am still flat. When the S&P was trading at 2400 back in September I mentioned the S&P’s 3rd Standard Deviation level at 2792 which may happen in a melt-up situation but I must say I am surprised by the quickness of this move. There is no doubt the Trump Tax Cuts have added to this move but by any technical measure this move is overdone and long due a decent correction of at least 3%. I am still flat and today I will now move my sell level higher to 2803/2815 with a 2823 stop. I am not going to move my buy level and will leave this unchanged at 2748/2756 with the same 2743 stop.
EUR/USD
Last week was one of the worst week’s in my six years of writing Tradernoble Daily Commentary as so many orders came within a point or two of getting filled before reversing direction against any revised T/P levels which is extremely frustrating. On Friday I emailed my Platinum Members to exit any short Euro position at 1.2110 and the low was 1.2111 before the market subsequently rallied 90 points. As a result I am now short the Euro at an average rate of 1.2160 and I will now raise my stop on this position slightly to 1.2240 especially as we are trading so far above the Daily Bollinger Band and Williams Index. Given how overbought the Euro is trading I would not be surprised to see the market sell-off to 1.2010/1.2060 where I will be a buyer with a 1.1970 stop.
March Dollar Index
Shortly after I posted on Friday morning the Dollar came within a few points of my 91.80 T/P level before trading lower to my second buy level at 91.30 for an average buy level at 91.50. Thankfully most of you do not trade the Dollar given its wide spread with the spread-betting firms which is good considering I was stopped out of my position at 90.95 and I am now flat. The 89.90/90.40 is massive support for the Dollar as a break and close below here could well see a large move lower which I do not expect at this time. As a result I will again be a buyer of the Dollar in this area with an 89.50 stop.
March DAX
My DAX plan worked well with the market trading lower to my 13165 buy level before rallying over 100 points. Unfortunately as I did not like the price action in the market especially given the strength of the Euro I covered this position too early at 13185 and I am now flat. Today I will again look to buy the DAX on any dip lower to 13090/13160 with a 13040 stop. I still do not want to be short the DAX at this time.
March FTSE
No change as I am still a buyer on any dip lower to 7630/7670 with the same 7595 stop. So far this buy level has missed a couple of times due to the renewed strength in Sterling.
Dow Rolling Contract
The only good thing about been wrong in my short Dow position was the fact that my stop was tight at 25670 on my average short 25560 position and I am now flat. Incredibly the Dow has spiked another 100 points on the re-open last night to currently trade at 25940. In my opinion this is insane especially with the 14 Day RSI trading at 87. I cannot remember the last time I saw such a high RSI. However with Bank stock so firm it is difficult to be short as one target level after another gets smashed. The Dow has resistance just above here from 25950/26050 and today I will be a small seller in this area with a 26120 stop.
March NASDAQ
The NASDAQ has also gapped higher on the re-open last night with the market now trading at my 6785 sell level. I am still short and I will leave my stop unchanged at 6830 as I do not want to risk too many points on this position especially if we see some rotation how of the Blue Chips into technology.
March BUND
Unfortunately the Bund also missed my 160.75 T/P level on my 160.67 long position before stopping me out of this trade at 160.20. To ram home a bad week for me, Weidmann’s comments about not raising rates any time soon saw a nice rally in the bund into the close which is frustrating. Today I will now look to buy the Bund again on any dip lower to 159.90/160.30 with a 159.60 tight stop.
Gold Rolling Contract
Gold had a nice rally on Friday on the back of the weaker Dollar and I am still flat. I still do not trust this market especially as we have strong resistance at the 1340/1350 area and today will only raise my buy level to 1308/1320 with a 1301 stop.
Silver Rolling Contract
Silver just missed my 16.95 buy level before following Gold higher and I am still flat. However Silver continues to underperform the Gold market and today I will only raise my buy level to 16.90/17.20 with a 16.60 stop.
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