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Tuesday, 22 Nov 2011
No Surprises in US Super Committee Failure
The congressional super committee that was assigned to solve the roadblock the government faced over the summer did not help to improve market sentiment. However, according to US bond yields and the recent performance of the USD the pressure is off the US right now as investors remain focused on events in Europe.
USD - USD Remains Supported Despite Super Committee Failure
The USD and US government bonds continue to be supported despite the most recent government failure to address the bloated US deficit. A lack of an agreement to increase taxes or decrease government entitlements such as social security and Medicare continue to elude Congress. This will likely push the big decisions further into the future after next year's Presidential election.
While Washington continues to drag their feet to make the tough decisions the USD and US bonds continue to outperform. The USD index has climbed within 100 pips of its October high while the US-10 year is yielding just under 2% as investors seek out safe haven assets. Despite all the faults of the USD (high debt to GDP ratio and potential QE3) investors are still supporting the USD and will likely continue to do so until a resolution to the European debt crisis is found.
EUR - Euro Bonds the Answer to Debt Solution
Spreads between German government bond yields and almost all of the euro zone nations are beginning to widen. This hints at increased in tensions due to the European debt crisis. With the German/French 10-year yield differential rising over 200 bp this signals an escalation of the debt crisis from the peripheral nations (Greece, Spain, Portugal, and Italy) to the core nations (France). Moody's note to investors yesterday warned of a potential negative rating outlook for France given the elevated borrowing costs and expected economic slowdown in the French economy.
One potential solution being pushed to solve the European debt crisis is euro bonds. The EU will unveil three proposals for Eurobonds on Wednesday. Any European issued bond would likely come with additional EU integration with regulatory powers to inspect budget finances and penalize nations that break EU budget rules. As the European debt crisis enters its second year fiscal union may be the only way to save the euro zone in its current form.
With both Merkel and Sarkozy publicly discussing the possibility of a nation leaving the euro zone it is no surprise the 17-nation currency continues to come under pressure. The late September low of 1.3360 is the first support level for the EUR/USD while a break here could open the door to the October low of 1.3145. Resistance is found at Monday's high of 1.3610. The mid-November high of 1.3860 should contain any near-term rallies.
JPY - Japan Posts Trade Deficit but JPY still Stronger
Japan posted a larger than expected trade deficit which is the 7th consecutive month the nation has registered a deficit. A sharp 3.7% y/y drop in exports was noted while consensus forecasts were for a decline of only 0.4%. The catalyst for the weak export numbers may be a strong JPY but lower global demand could also have weighed on the macro data.
The USD/JPY continues to hold above both last week's low of as well as the initial support of 76.80 and Friday's low of 76.55. After here there is a lack of support on the daily chart until the all-time low while resistance is back at 77.50 from last Tuesday's high. The EUR/JPY is also moving lower as real money funds shed exposure to the EUR and may be parking funds in Japanese government bonds as a safe haven. The swing low of 100.75 stands out as support on the daily chart with resistance of 106.50 from the mid-November high.
Gold - Correlation between Gold and Equities on the Rise
During the second half of the year the correlation between gold and equities has climbed. According to Scott Barber with Reuters the correlation between gold prices and the MSCI AC World Index has risen to 0.5, indicating the two instruments trade in the same direction. A negative correlation would indicate the two assets move in opposite directions.
One explanation for this change in performance may be a need for increased capital. Leveraged equity investors who were also long on gold may have had to liquidate profitable gold positions to maintain other losing stock investments when equity prices went south in mid-July.
Traders may be able to use the correlation to their advantage as gold prices would likely rise with equities in the risk on environment while falling in a risk off scenario. Given the dire situation in Europe, the latter seems more likely to prevail. Support for spot gold is found at the November low of $1,681 with resistance at the November 10th low of $1,735.
There is a bullish wedge pattern that has formed on the EUR/USD daily chart. The falling resistance line is off of the October high and the support line falls off the November 1st low. Resistance is found at 1.3615. A break here and the EUR/USD could test the November highs near 1.3850. Should the pair continue its trend lower the pair could encounter support at the rising trend line from the January 2010 and October 2011 lows at 1.3270. Traders may be eyeing the October low of 1.3145 followed by a deeper move to the 2011 low of 1.2875.
After breaking lower from the late October-mid November consolidation pattern the GBP/USD rose back to the previous support line at 1.5850 only to turn lower once again. This is a textbook retracement to a previously known support that has now turned into resistance. Support may be found at the October 18th low of 1.5630 followed by the October low of 1.5270. Resistance comes in at the top of the previous consolidation pattern at 1.6075.
The slow decline of the USD/JPY back to its all-time low at 79.60 continues while the charts show very little support to prevent the move. Any attempt to bid the pair higher may encounter selling pressure at the November 15th high of 77.50 followed by the long term downtrend from the June 2007 high which comes in at 79.10.
The rally from the late October low continues to gain steam as the pair approaches the October high of 0.9310. Both weekly and monthly stochastics continue to move higher. A break of 0.9310 will expose the 20-month moving average at 0.9450 followed by the February high of 0.9770. Support is off of the November 3rd low of 0.8760 which coincides with the 100-day moving average. While perhaps a bit extreme the pair may eventually target the falling trend line off of the 2003, 2008, and 2010 highs which comes in at 1.1200.
The Wild Card
A breakout to the downside was confirmed from the triangle consolidation pattern on the daily chart. The chart pattern measures 45 points. Forex traders should note this would roughly take the index to 1,177 which is the 50% Fibonacci retracement of the October move.
|22:30||AUD||AIG Manufacturing Index||46.9||-||-|
|23:30||AUD||MI Inflation Gauge||m/m||0.0%||-||-|
|01:35||JPY||Final Manufacturing PMI||52.1||52.1||-|
|08:00||EUR||Spanish Unemployment Change||-64.4K||-32.4K||-|
|08:15||EUR||Spanish Manufacturing PMI||53.8||54.2||-|
|08:45||EUR||Italian Manufacturing PMI||48.4||49.3||-|
|09:00||EUR||Final Manufacturing PMI||51.0||51.0||-|
|13:30||USD||Core PCE Price Index||m/m||0.0%||0.0%||-|
|14:45||USD||Final Manufacturing PMI||53.7||54.1||-|
|15:00||USD||ISM Manufacturing PMI||55.5||54.9||-|
|15:00||USD||ISM Manufacturing Prices||38.5||40.1||-|