The Euro continues to climb as the Dollar continues to weaken and, not surprisingly, every other asset class continues to strengthen (following the trend of the year to date).
Obama’s visit to China may have been made ostensibly to have a chat about economic issues but the Chinese administration probably sees no need to change its economic policy just yet and anyway does not want to see a floating Yuan for the damage this would do to its foreign currency holdings. In light of this the continued use of the Euro, Yen and Swiss Franc as a quasi replacement for the Dollar is unlikely to diminish. While the US persists in its quantative easing policy and its more general structural deficits this state of affaires is unlikely to alter. This having been said the US economy is definitely coming out of it hibernation faster than many others and there are a certain number of Fed governors who are not so happy with Ben Bernanke’s dovish approach.
The trend is still very definitely Dollar negative and while the US administration will play lip service to a ‘strong dollar’ it will not be unhappy with a slowly weakening currency for whatever reason. Numbers coming out of the various agencies are also indicating renewed strength and (whisper it quietly) we might be closer than many believe to some form of rate pressure to the upside.
Markets surged yesterday rather confirming our impression in the morning statement that too many people were getting short and that there was a danger of a bear squeeze. The FTSE peaked at just shy of 5400 not quite reaching our resistance level of 5415 but managing to bash through the 5365-5380 range. This morning sees us slipping back through this level and the FTSE is called off 20 points at around 5362. If we do not regain the highs in early action there is a reasonable chance that some profit taking will emerge from the wings.
The one fly in the ointment over the FTSE and US rally has been the failure of the European indices to break into new highs. The Cac, Dax and Euro Stoxx all remain below Octobers highs (although not by much) and it must pointed out that the upside for the UK and US will remain uncertain so long as this state of affaires remains.
Currency markets, as mentioned already, are all about US weakness and yesterday proved to be the turn of the Pound to make a break for the hills. We talked about the 1.6740 resistance and this did hold for an hour or so but once breached the move higher developed through the session. We are now sitting comfortably above the 1.68 level and recent momentum is showing definite sterling attraction. If we can get above yesterdays highs at 1.6880 the next target will be the failed rally level from August at 1.7040 but it must be pointed out that the pound does seem to tend to flatter to deceive both to the up side and to the down. Just as you think a downward move is in the offing we bounce back and vice versa to the up. Clients seem to be dangerously short sterling though at these prices and (just as with the indices yesterday) if our clients are reflective of holdings across the retail spectrum the bears might be in for a bashing here as well.
The big recipient of all this uncertainty remain the yellow metal and it is tempting to speculate that no matter which currency gains the upper hand the continued undervaluation of the Emerging country currencies (the BRICs) will perhaps drive the price of gold to undreamt of levels. At $1135 trend resistance levels are difficult to identify but 1175 and 1194 look to be the next targets. Pull backs are just as difficult to analyse as well… but…. 1070, 1035 and 967 (!?) would be the wish list of any remaining bears.
We commented yesterday that with all the joy bouncing around that Oil seemed to have been left behind a bit….(queue…a 250 cent rally!). While this move was very nice for our clients the black stuff is still lagging a touch and the failure over the last month to challenge for new highs may well be weighing us down. Since the highs at $82 in the Nymex on the 21st oct we have had a series of attempted rallies, all of them failing at lower and lower levels. We now have a very nice falling trend line top (currently at 79.90) to aim at. Should we close above this there may well be a reaction move to new highs but (and there is always a but) the longer we remain below it the easier it will be for the bears to drive prices lower. We are currently at 79.10 in the January contract and many eyes will be watching for a breach.