Ordinarily, I would have called Wednesday's (July 10, 2013) close on the S&P 500 (SPY) a stalemate that potentially signals a reversal in fortunes for the index. The flat close occurred right at resistance from the June highs.
A stalemate between bears and bulls at resistance from the June highs
The news cycle rules right now. This earnings season promises to be full of market mood swings if the reaction to the Federal Reserve minutes for June's monetary policy meeting and Chairman Ben Bernanke's Q&A session following a speech are any indication. The stalemate in the S&P 500 during U.S. market hours occurred as the market dipped ahead of the release of the minutes of the last Federal Reserve meeting on monetary policy, spiked up in trigger-finger response to the release, and then calmed back down to settle at flatline. Overall, the minutes contained no new information. What Bernanke said during the Q&A of a speech later in the day apparently tipped the balance. He was responding to a question about a "hawkish Fed." As reported in Reuters:
"…the Fed needed to keep a stimulative monetary policy in place given the low level of inflation and a 7.6 percent unemployment rate that '…if anything overstates the health of the labor market…The overall message is accommodation…highly accommodative policy is needed for the foreseeable future.' [Ben Bernanke in single quotes]"
Bernanke's response was an implicit reference to the labor market's poor participation rate and likely also an implicit reference to persistent underemployment in the economy. This response was likely also an implicit attempt to cast doubts on the sustainability of the recent rise in interest rates. I sold my iShares Barclays 20+ Year Treasury Bond (TLT) put spread ahead of the minutes (but not my EEM put spread), assuming the debate in the minutes would serve a reminder that the Fed has no intention of tightening policy anytime soon. While the minutes did nothing to help TLT - it still closed down 0.8% on the day - it looks like Bernanke's Q&A may have provided the successful trigger. (At the timing of writing, S&P futures are soaring higher, rates are lower, and some Asian stock markets are at three-month highs.)
While the S&P 500 ended in a stalemate, the U.S. dollar (UUP) closed the day as a resounding loser, a bit surprising given interest rates closed higher on the day. The dollar index closed down 0.7% in a move that looks dramatic enough to signal an end to the dollar's recent rally off the June lows. (Note the neat intraday bounce off the QE2 reference price).
The dollar index falls back from three-year highs and retests the QE2 reference price
At the time of writing, the dollar's losses continue to build between U.S. trading sessions. Bernanke's comments sent the dollar immediately plummeting against all major currencies. The charts below show the daily on the British pound (FXB) and the intraday on the euro (FXE). The daily shows a pattern that is typically indicative of a bottoming underway (for context on my bullish bias see "A Surging U.S. Dollar And Carney Overwhelm Bullish Underpinnings For The British Pound"). The pound is bouncing off a retest of 2013 lows which in turn was at levels last seen in mid-2010. The intraday 15-minute chart on the euro vs the U.S. dollar shows the steepness and swiftness in the dollar's sudden loss in the Bernanke wake.
The British pound soars 1.9% off its bottom versus the U.S. dollar
The euro practically goes "parabolic" intraday versus the U.S. dollar
I remain bullish on the British pound, but I have used the fortuitous surge in the euro to start a little hedge by building a short on EUR/USD.
The mood swing in the Canadian dollar (FXC) was just as dramatic.
USD/CAD goes from strength to weakness in a heartbeat
All my well-laid out reasons over the past several months for remaining bearish against the Canadian dollar meant little in the latest rally for USD/CAD. It was really all about strength in the U.S. dollar. For that reason, I exited longs into the rally. I am now re-accumulating my long position.
The dollar's sudden weakness was even enough to send the dollar-yen currency pair (FXY) back under the 100 level. Panning back, it is clear that USD/JPY has been in a wide trading range since April. I see no near-term catalysts to break this range on the high or low-end. Between bounces, there are opportunities for yen bears and bulls to make timely trades.
Wide churn in USD/JPY since the Bank of Japan's QQE
Finally, the Australian dollar (FXA) has finally put in a string of solid up days in its own attempt to bottom. The market has so far responded relatively positively to the June unemployment report that showed an increase in the Australian unemployment rate from 5.5% to 5.7% but an increase of 10,300 jobs thanks to gains in part-time employment. As indicated in an earlier post, I am using rallies in the Australian dollar as an opportunity to fade. In this case in particular, I think the pop is just relief the report was not worse.
Trading in the Australian dollar may be a tad bit more "jumpy" than usual ever since the Australian dollar plunged sharply on the heels of a simple statement from Reserve Bank of Australian (RBA) Governor Stevens during a speech at the Economic Society of Australia (Queensland) 2013 Business Luncheon on July 3rd. Stevens went off-script to improvise in saying that that the RBA deliberated "for a very long time" before deciding to leave the cash rate at 2.75%. If it was a follow-up to his earlier jokes, the audience missed it as there was no resumption in laughter. Presumably, this statement implied that the RBA was very close to deciding to drop rates. But even without that implication, I think Stevens equivocated on the exchange rate in the prepared remarks. In the quote below, he seems to say that the high valuation of the Australian dollar is finally over.
"…the exchange rate was somewhat too high for a period. It is no secret that I, for one, have been surprised that the foreign exchange market has taken as long as it has to reflect the fact that the terms of trade peaked some time ago - nearly two years ago, in fact. In the end, though, market-based exchange rates do eventually adjust - and usually in a less disruptive way than those that are maintained artificially. A flexible exchange rate is an important part of adjustment over all phases of the cycle and it remains a major advantage that we have one. If the economy 'needs' a lower exchange rate, it will probably get it."
Regardless, the Australian dollar has already reversed all the losses that immediately followed, so the mini-media storm that brewed in Australia over these remarks already feels distant. I was a bit bemused by it all because here in the U.S., we are well-accustomed to officials from the central bank jawboning reactions out of the market. Bernanke's Q&A is yet one more case in point.
Just a relief rally for the Australian dollar?
Source for charts: FreeStockCharts.com
While it seems the accumulated sharp reversals in U.S. dollar currency pairs signals an end to its rally, I do not think this next equates to a sustained sell-off in the U.S. dollar…even against the British pound. Instead, I think the upward momentum has just ended. In its place should come more churn and chop as the market's mood swings quickly from one concern to the next. In particular, it remains to be seen whether the mini-(manufactured) panic over bond tapering is replaced by concerns that the stock market is well ahead of a still moribund economic recovery…or whether the stock market freely rallies on the assumption that accomodative policy remains supportive. The pace at which the dollar resumes a decline may well depend on the accumulated impact of future jawboning from members of the Federal Reserve.
Be careful out there!
Additional disclosure: In forex, I am short Australian dollar, short euro, long British pound, short yen, short Canadian dollar. (Only the position in the pound is currently longer than "short-term")