Weekly Analysis Blog Monday

This week’s central bank talks strengthened my conviction that the US and for the matter the world is stuck in QE. On the back of Bernanke’s and the rest of the Fed’s even split on QE, stocks rallied on the week with the NAS gaining 3.18%, the S&P up 2.38% and the Dow 1.5% while the buck lost 1.89% and the US ten year yield corrected 6.6% off of a high at 2.72% to finish off the week at 2.54%.

US indexes, the buck and yields all responded in sync to the Fed’s statements this week. Every major index worldwide made gains with the DAX gaining 3.74%, the AUS200 up 3.52%, the Hang Sang plus 3.2%, the Nikkei plus 2.19%, and the EURSTX50 and FTSE gaining 1.7% and 1.61% respectively. The ten year yield all over the world took a breather—all except for troubled Spain and Portugal which saw spikes of 2% and 5.5%.

The world took a breather this week with the VIX moving down below the 10 period moving average posting 13.84 with the RSI at 38.5 still shy of overbought. This complacent move is thanks to Bernanke and his crew, with their very dovish talk this week.

VIX-Primary-Analysis-Jul-14-1810-PM-1-week

It is really surprising to find that some analysts are holding on to the thought the US economy is better and that there will be a tapering this year of asset purchases. Like I have been saying, the Fed is stuck in QE. If they do taper, I strongly believe the markets will get hammered. If one takes the time to look under the headline numbers that are good, it doesn’t take much to realize that the US economy is far from a recovery. As a matter of fact, the parts of the US economy that are doing well are only so because of the QE. Once this is gone, those markets are too. Interest rates are going up regardless of what the Fed does. All the Fed can do is keep the bondholders guessing as to whether or not they are going to keep printing or pull back and begin to dry up all the excess liquidity. But don’t be fooled. The Fed knows that the minute they pull back, the party is over. So here is what I am left with. The Fed will never admit that they cannot pull out of QE. But since they cannot and since they also cannot admit this, they will have to keep playing the dove-on hawk-on yoyo game with the markets. If they pull off QE, yields will move up at a faster pace; if they admit they are stuck, rates will move up even faster for the fear of inflation; so, I believe that the Fed will keep playing the yoyo up until either two things happen: the bond market calls their bluff or steady rising yields start to expose some bad investments causing the Fed to run to the rescue agitating yields up anyway. I really do not see how rates can possibly reverse at this point. Market pressures are too strong for the Fed and the rest of the world.

And to make matters worse this week’s US data came in bad with inflation picking up. PPI YoY came in hot at 2.5 vs. 2.1 consensus up from May’s 1.7%. PPI ex Food and Energy also ticked up printing 1.7% vs. 1.6% eyed. Additionally, in May, Americans used their credit cards to the tune of 19.6B beating consensus 12.5B up from April’s 10.9B. Just think, with all the new part time service sector jobs, do Americans really need to be out buying foreign goods on credit? NFIB Business missed down .1% posting 93.5 vs. 96.2 eyed. Initial Jobless Claims for July also missed coming in at 360K vs. 340k up 4.4% from June. Reuters Michigan Consumer Sentiment fell .2% and missed printing 83.9 vs. 85.0 consensus. And I would also like to add that according to RTTNews, the US used 13% less oil these last four weeks then it did in the same four weeks a year ago. And I don’t think this is because the US is now more energy efficient either. I am certain that it is because the economy is slowing down again. And Brent crude hit 107.94 Friday–very bad news for an already weak US consumer.

And it’s not only them, if the buck keeps rising this means that nations whose currencies are weakening against the buck will have to pay that much more for oil.

And to make matters worse, there is no doubt that China is cooling off. Even though China’s Trade balance beat coming in at 27.1B vs. 27.0B, imports and exports are down .7% and 3.1% from a year ago. Chinese officials and analysts are worried that this year China is going to miss possibly slowing more as the year churns. However, China’s GDP beat tonight coming in at 7.7% vs. 7.5 consensus which should give some support to the AUD and the NZD.

After bottoming on Thursday the Greenback has been consolidating in what looks like a B wave triangle of a zigzag yet to complete. One the 15 minute chart the move down counts as a nice five waves. The move sideways is definitely corrective. We could see some more dollar weakness with targets at the 80.88 AC equalization and 79.49 161.8 C of A.

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Ben’s dovish talk trumped the ECBs dovish talk this last week with the EUR/USD taking back almost 2% on the week, regardless that the EU has been coming out with some bad fundamentals. Industrial production fell posting -1.3% vs. .6% eyed down 3% in May. Germany’s Industrial Production also missed coming in at -1.0% vs. .9% consensus. The Pound also rallied on the buck hitting the 1.5222 mark and retreating a bit to end the week up 1.53% on the week. The UK has also been weak fundamentally; hence the dovish talk from Carney. This week coming is going to be a big week fundamentally for both Germany and the UK with the BOE minutes being the biggest potential mover in FX. As for the Pound and the EUR, the moves up are looking very impulsive on both charts and technically are confirming the USD Index with what looks like incomplete zigzags resting in B waves with possible targets at the 1.53 at the 138.2 A extension and the 1.5469 A=B and the 161.8 C extension of A.

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The Commodity dollars held up a bit this week against the buck with the NZD moving up .85% and the AUD squeaking out .25%. Both were up better than 3% on Thursday only to give most of the gains back by Friday’s close. Given that China’s GDP came in better than expected, the AUD and NZD might take a breather. AUD does look like it might make a move up after it finishes what looks like a wave five yet to complete before it turns around. Both the Aussie and the Kiwi are due for good retracements and with the good Chinese data they might get it this week.

AUDUSD-Primary-Analysis-Jul-14-2111-PM-4-hour DX-A0-Alternate-1-Jul-07-1819-PM-1-hour1

Even with oil’s big gains of late, the CAD followed the Dollar Index down this week losing 1.73%. But maybe this needs to unwind too. Many analysts are looking for the buck to gain this week. However, I am sticking with the charts and they tell me this dollar correction is not done yet. I am looking for the buck to lose some more this week with the stocks making new highs. Technically things look so.

Have a great day trading.

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