Wednesday, July 1, 2009

Market Preview: What Channeling FX, Commodities, Stocks are Saying

(As of approximately 12:00 GMT WEDNESDAY, 7:00 am EST)


The overall theme of Tuesdays' trading (and Wednesday's in Asia) was to undo Monday's moves to a greater or lesser extent, reflecting a continued lack of clarity on the health, or even direction, of the world economy. As of this writing on Wednesday, most of yesterday's winners and losers have once again spent the day retracing Tuesday's move to varying degrees.

The continuing seesaw movements within ranges established over the past 6-8 weeks appear to reflect continuing indecision as markets await a clearer overall them from the news to reveal the coming direction both regional and international economies.


As suggested above, currencies continue to provide range trading opportunities as they bounce between resistance and support on the daily charts. Even those who day trade using far smaller time frames would benefit from awareness of the prevailing longer term price channels shown on the daily charts.

This is especially true when a given currency pair is potentially "in play" for short term traders, that is, near a longer term support or resistance level, and there is possibly significant news coming out that could move them.

For example, with the AUD/USD, we have a convergence of both impending news a tight trading range. Note the daily AUD/USD chart below.

AUD/USD Daily Candlestick Chart

Despite many cultural and political similarities between Australia and America, the AUD and USD are largely opposites that thrive under opposite conditions. The AUD is a high interest rate paying, commodity based, currency, which currency traders see as among the riskiest of the major currencies. The USD, however, pays very little interest on deposits, is far more influenced by consumer spending than commodity exports, and forex traders see it as a safe-haven to buy in times of heightened fear in the markets.

Not surprisingly, the AUD/USD has been rising since early March along with overall cautiously rising optimism about the world economic recovery, as reflected in rallies in international stock and commodity prices over the same period. Currency traders had "risk appetite" and were thus hungry for the AUD over the low yielding USD.

Since the beginning of June, however, risk appetite has ceased to grow, assets tied to it have stopped climbing and settled into tight trading ranges, awaiting news that might suggest growth in jobs, earnings, GDP, or other major metrics to match the 20-30% rise in stocks (and far more in some commodities like crude oil).

Reflecting this stalling optimism and risk appetite, the AUD/USD pair has settled into a tight horizontal channel shown above. Because the past few weeks have been especially lacking clear signs of economic direction, the pair, like many others, is sitting in the middle of the channel established since June began.

Wednesday may provide a tradable move to either support or resistance. As of this writing, Australian Building Approvals m/m declined 12.5%, far worse than the 3.2% forecasted. Coming later today, ADP Non-Farm Employment Change, the ISM Manufacturing PMI, and Pending Home Sales could give the pair a shove, especially if all weigh in for/against the USD.

World Stock Indexes

Stocks too continue to oscillate within multi-week trading ranges as they await market moving news or a clear theme in the news of either optimism or pessimism. On Tuesday Asian stocks closed up, but European and US exchanges were overall down, and early Wednesday Asian markets have followed suit by closing down. As of this writing, Europe is up around 1.5% overall.

Thus stocks overall are holding their 20%-30% gains since March, despite an apparent lack of data suggesting a similar improvement in employment, earnings, GDP, or any other significant economic measure within the coming year. However, as noted above, retaining these gains may become harder over the coming weeks unless there are positive earnings or other economic news to justify these gains. Positive earnings will be especially needed from the financial sector, which has been the source of both major declines and rallies for the past two years.

Guidance on second quarter earnings should begin to come out next week, and may well bring markets the direction they seek. Especially important will be financial sector earnings, for these have been the catalyst of all major market moves over the past two years.


Crude and Gold have similarly stuck to multi-week trading ranges. As the below chart shows, crude has moved up about 3% then retraced the full range on Monday and Tuesday, providing nimble traders ample profit opportunities in either direction. Trading in a channel does not always suggest lack of volatility.

Crude Oil Rises Monday June 29th , Retraces Tuesday June 30th.


Given that risk-appetite assets like stocks, commodities and higher risk currencies like the AUD and NZD are still near 2009 highs despite considerable uncertainty that there will be meaningful growth to match their rise, there are two likely outcomes in the coming months.

1. These may be vulnerable to a retest of March lows.

2. However, a continued longer term range trading might also provide the needed consolidation period for the recovery to catch up.

Given the amount of potentially very bad news for the financial sector, we must prepare for the first scenario, but pray for the second.

No comments:

Post a Comment