Assisted by a surprise bullish ZEW Economic Sentiment reading of 7.6, the euro put in another solid day on Tuesday closing up 0.5% at 1.3004. The U.S. stock market -- which had been lagging for the last month -- also played a supportive role shaking off its autumn cold to post a new 1-month high settlement. The big story for currency analysts and traders however continues to be the yen. A weak yen continues to signal that the powerful Japanese investor class is finally buying into the global recovery theme and putting money back to work around the globe, reversing the previous trend of bringing yen home. Traders have not seen USDJPY moving along with the other major currencies in earnest like this since 2005-07. There is a term for that behavior, i.e.: a bull market.
While we do have a bull market in U.S. stocks, and in AUDUSD and AUDJPY, it would be a stretch to identify the euro as a bull. While we do think current euro shorts, namely Wall Street hedge funds, are liable to be swept out of their positions on a move above the late summer high at 1.3170, we see selling a rally as a proper long-term approach. The 1.3500 level in EURUSD would be the next natural barrier should buy stops from 1.3175 to 1.3200 be elected. Both the primary pattern -- 9 months to a few years -- and the grand pattern -- 5 years -- are still bearish.
Regarding Chairman Bernanke's testimony later today, we can't imagine the financial markets not liking his plans for continued bond purchases going forward. Asset class markets have been following Bernanke's playbook since 2009 and QEI. The chairman may even have a few nice words to say about business and employment growth, and consumer spending. The bottom line is we never know how markets will react to short-term news events such as FOMC, we do however feel that Bernanke's policies have contributed mightily to the current bull markets in stocks and Aussie -- which also benefits the euro with its little 0.75% yield.
The Aussie really showed its metal during the stock sell-off following the U.S. election on November 4th. Because the Aussie held firm, global investors saw that stock correction, as just that, a correction. It also helped that the yen DID NOT strengthen in early November, as it had every other time we've seen U.S. stocks weaken over the past 5 years. Traders and macro investors saw this combination of Aussie strength and yen weakness as another sign that the global economy was on a more sure footing than the picture the press was painting. We like AUDUSD to challenge 108.00 over the near-term.