Yesterday afternoon I was writing a post on a pairs-trade setup for the Aussie200 index against the S&P 500 index. The hourly charts were pointing toward the relationship between the 2 getting unusually strained (> 2 standard deviations apart) which would suggest we are getting close to a convergence occurring. Overnight this has moved even further with the Aussie index remaining very strong overnight relative to the US market - it seems. I think that this will still be worth keeping an eye on in days to come but for now its worth looking at the love the Aussie index is receiving from the market.
First of all it was the bounce in iron ore prices that sparked a surge in local producers yesterday with Fortescue (FMG) making its 3rd day or gains in a row with a stand out performance. Whilst it's nice to talk about strong market performances I think the concerning thing is that these types of market responses smack of market desperation. Iron ore prices rally = everything is rosy = pile into producers. The reciprocal of this applies too which is why you shouldn't be dealing in these companies without having a very clear view as to where you think the price of iron ore is headed in the short, medium and long-term. As I'm writing though Rio trading in the US is up 0.9% in a down market so the joy has made it through the night unscathed. This article was posted a few weeks ago on some key iron ore levels to consider so is well worth taking a look at.
Reading through (some of) the IMF economic outlook it was the remarks on austerity that were some of the most interesting. There was of course the downgrade of growth expectations which was notable but much less surprising. The crux of the story is the concern shown for the negative impact of austerity on countries that are already under massive economic pressure. As I was reading I thought 'I bet Paul Krugman will have something to say about this'. And he did. So rather than read my thoughts have a look at Krugman's blog piece (which can be found by clicking here) - as a Nobel Laureate he can probably explain it better than me. All the way back in June I wrote a post which detailed some of the layoffs that had occurred in the public school system in the US - given what the IMF has said this is worth reflecting on too when considering the macro outlook for the US.
One of the nice thing for traders of the AUD yesterday was its strength relative to global peers. Even though the markets overnight have been more subdued I think that there can still be positives taken from its performance:
The horizontal line corresponds with the previous trough on the daily chart so is a potential source of support. On the hourly chart shown you can see that this level has become an inflection point for price which has seen quite a bit of USD strength overnight in the wider market but has managed to repel it. As I said yesterday I don't think there is a huge rush to be long AUDUSD. The 5o period moving average is flattening and looks as though it may be starting to rise. I would like to see that and a close above the +1.25 SD of the 50 period moving average before getting too excited.
As you can see with the EURUSD chart the pressure here has been more acute. If you compare the relative positions of it and the AUDUSD to the 50 period moving average you can make a much more bearish case for the euro at the moment. As a side note though with the flattening of the 200 period moving average, if the current trough holds there is a good possibility of a move back to the 200 period mean just below 1.2940.
Oil is really interesting at the moment. The big picture is clearly a large sideways trading range but in the here and now there seems to be new life. Regardless of what you believe the economic drivers to be the price has now managed to climb out of the recent range dominated 4 sessions ago by a large negative candle. This is a short-term price breakout. Yesterday in a number of Asian exchanges it was the energy sector that was performing amazingly. Using the idea of following where the money goes it would seem the market is feeling more bullish on energy.