Greetings to all traders... well today was my first day back in the
market in about a week after taking some vacation time. It looks like I
missed some fireworks with last Friday's Non Farm Payrolls event and
the fallout that usually occurs the next trade day. Overall, today's
market action looks pretty cut and dry...
Crude gains 3% sending euro, pound sterling, and S&P 500 higher:
As
I was catching up on the markets this morning I saw that the dollar
made about a 36-hour comeback with the help of some nasty geo-politics
in the UK government, an unbelievable NFP/Unemployment Rate event,
another downgrade on Irish sovereign debt, and weaker crude and gold
prices but most of the dollar's gains were erased today as crude oil
does what it's supposed to do -- lead the charge higher...
The
EUR, GBP, AUD, CAD all move off their lows as spot crude sliced through
the $70 level after falling below $68 in prior trading sessions.
Higher-yielders in the Forex market were not the only beneficiaries of
crude's strong gains as the S&P 500 and gold also managed to close
the in the green. What really helped push crude up this afternoon was
more positive comments out of OPEC oil ministers. At 1353 EST these
comments out of OPEC were what gave crude the final boost it needed to
break that $70 level:
"Sees oil prices between USD$70-75 per barrel by year end, aims for USD$80 per barrel; OPEC will continue policy of implementing agreed output cuts"
With
OPEC talking prices up again, crude oil futures managed to closed at
$70.01 on the day which is the highest close in 2009 and the highest
close since November of 2008. As crude led the higher-yielder,
higher-risk markets to strong gains this pushed the US Dollar Index
down over 1.30%. The S&P 500 was close to making its highest close
so far of 2009 and this too hurt the dollar in today's trading.
Basically it was back to business as usual in my view.
In my
review of the euro's price action and price patterns from the
Sunday/Monday trading session I see many traders used the opportunity
to pick up the euro, pound sterling, and Aussie at bargain prices.
Those same type of price action patterns in addition to what we saw
with the correlated markets such as crude and the S&P 500 are why I
maintain my trading bias not to buy the dollar or yen against the
majors and crosses but to buy the euro and its higher-yielding comrades
on the dips
but only when the S&P 500, crude oil,
and gold move higher and make gains. I want to reiterate I am not a
euro bull and on a fundamental basis I'm very bearish on the Eurozone
but on a trading basis I'm not going to fight the euro's correlations
to equities and commodities...
Big treasury auction on Wednesday:
On
Wednesday the Treasury will hold another auction that will be
watched as closely as any thus far... the Treasury is slated to auction
$19 billion in 10-year notes and $11 billion in 30-year bonds. The
recent trend has been for diminished demand for Treasuries dated beyond
7-years and the shortest dated maturities have been the ones most
aggressively bought up which means market participants have little
faith in the long-term fundamentals of the US economy and a rather
negative view on the US dollar.
The Fed has a big problem on
its hands
with the 10-year yield skyrocketing about 180bps bottom to top the past
few months. This bearish move in Treasuries is hurting the already
battered housing market and will only serve to prevent a recovery. The
10-year note is the Treasury that's directly correlated to the US
housing market and to mortgage rates and when the 10-year is bearish
and its yield goes up it costs potential homeowners more money to
borrow and purchase a home.
So
if tomorrow's 10-year auction is sloppy I would expect to see Wall St.
sell-off and the dollar to potentially rise against the euro and pound
sterling. How can you tell if the auction is strong or weak? There are
two very easy ways...
1. Bid to cover ratio: a strong bid to
cover ratio means there is healthy demand for the issuance. It's no
secret the Treasury is oversupplying the market with debt but if market
participants are willing to bid up Treasuries despite the staggering
supply, that is a very bullish thing for Treasuries and Wall St. would
respond positively to this. Should the bid to cover ratio come in
lackluster that would be a sign that market participants are forcing
the Treasury to pay them more money to buy their debt.
2.
Indirect bidding: indirect bidders are basically foreign buyers. Some
of the recent fundamental data seen in TIC show foreign demand is down
considerably and this is something the Treasury wants to see turn
around. If indirect bidders like the Chinese pullback their money-flows
from longer dated US debt this would make the auction sloppy and
negative. Conversely, heavy money-flows from indirect bidders would be
a confidence booster for the higher-risk markets.
I recommend
all traders monitor the results of these monumental auctions on
Wednesday. Treasuries are down over 6% this year and this market needs
a strong auction with the 10-year and 30-year. All market participants
will be watching and reacting to this big geo-political and fundamental
event.
Wednesday trading:
As
I'm just getting back into the market I really do not have much else to
add in terms of the various fundamental and geo-political events
effecting market movements but I do want to cover a few events on the
fundamental calendar which is overloaded on Wednesday.
Euro fundamentals--
The
two biggest fundamental events out of the Eurozone tomorrow are German
Final CPI and a speech by ECB Weber. Keep a close watch on ECB Weber
and his comments as he holds the power to talk the euro up or down
tomorrow. Several ECB comments released today were very euro supportive
which has been the recent trend. All the talk out of the ECB about
quickly reversing their "special measures" have been helpful to give
the euro an added boost against the dollar.
USD fundamentals--
The
dollar by far has the most on its plate tomorrow... the biggest
fundamental events are the latest Trade Balance figures, Crude Oil
Inventories, Beige Book, Federal Budget, and speeches by Fed Lacker and
Duke. The dollar is at fundamental risk tomorrow especially if traders
decide to punish it for the ballooning federal deficit. In addition, if
the Beige Book makes any mention of the Fed possibly further monetizing
debt to keep yields down I see the dollar getting hammered again.
As
far as trading goes I will continue taking my cue from crude oil, the
S&P 500, gold, and of course how the markets respond to all the
fundamental events tomorrow. I'm still very much against the dollar and
yen and I will not touch either one of them unless I get a very high
probability price action pattern or the higher-risk, higher-yielding
markets have another meltdown. I can't stress how important it will be
to watch the Fed and that Treasury auction tomorrow... fundamentals and
geo-politics are clearly driving money-flows in this current market
environment.
EUR/USD key levels will be posted in the morning
and as always, please use strict risk and money management tomorrow as
I expect a good deal of volatility and price swings.
-David
Visit Verite FX
