This Great Graphic, composed on Bloomberg shows a potential head and shoulders bottom pattern in the Australian dollar. The left shoulder was set in the first part of the month near $0.6930. The head was carved out in four sessions around the middle of the month a cent lower. The right shoulder was created over the past two days, with yesterday’s spike to $0.6920, before staging an impressive recovery.
The first two and a half weeks of the New Year saw persistent selling of equities, commodities, and emerging markets. In the foreign exchange market, the dollar-bloc and sterling were crushed. The yen was the single biggest beneficiary, and speculators in the CME are net long the yen in the futures market for the first time since late 2012.
On the last day of November, at the conclusion of its five-yearly review of the composition of the Special Drawing Rights (SDR), the IMF elevated the renminbi to its SDR basket. The RMB is now one of five major ‘freely usable’ reserve currencies in the international monetary system.
Speculative activity in the CME currency futures picked up in the latest reporting period. There were six significant gross position adjustments, which in our work is more than 10k contracts.
The gross short speculative euro position fell by 17.9k contracts, leaving 209.6k. Since early December, 53k gross short euro contracts were covered. During the same time, about 17k gross long contracts were added.
The US dollar remains strong against most currencies. The exceptions are the Japanese yen, Swiss franc and euro though the franc and euro pulled back in the US afternoon before the weekend. The greenback is still appreciating on a trade-weighted basis, which is the metric that counts in assessing its impact on the overall economy.
Much of Latin America has seen an unusually long period of relative political stability since the early 2000s. With the exception of Cuba, democratically elected governments seem embedded throughout the region. The political rules of the game largely seem to be followed. Indeed, the international outcry following the 2009 coup that removed Honduras’ president, Manuel Zelaya, served to reinforce how much Latin American politics had changed since the 1970s, when military dictatorships were the dominant form of government.
Sterling fell 4.25% from the high on December 28 to yesterday. It has been confined to yesterday’s range today. After finishing below the lower Bollinger Band yesterday, it has moved back into the band today.
The Bank of England meets tomorrow. It is way too early to seriously look for a change in policy. At most, MPC member McCafferty may abandon his formal call (dissent) for an immediate rate hike. He has done this before. We suspect if the hawk does rejoin the majority; it will have no more significance than his dissents.
So far, it has not been a happy new year for equity market investors. The Australian equity market lost A$100 billion in market value in the first week of trading, mirroring a dire global trend.
If we are to believe the “January barometer”, things may be about to get worse. The basis for the January barometer is the belief that when the equity market ends in the black for the month of January, the subsequent year will be prosperous for equity markets, while a negative equity market return in January signals a bearish year for stocks.
Since the initial spike higher when the BOJ provided some operational tweaks to its asset purchase program on December 18, the dollar has fallen 5.6% against the yen through Tuesday’s low near JPY116.70. We had warned that the break of JPY120 would spur a move to JPY118, and the move below JPY118 targeted the August low near JPY116.20.
