Currency war remains the main focus

It feels that currencies are currently driving all the asset classes. A weak dollar is certainly spurring a strong commodity market, across the board. Bond markets still remain strong as intervention by the US to keep yields lower is continuing the QE process. Equity markets are still quite strong, as volumes are low and corporate news relatively healthy.
The problem with a weak dollar is it’s adversely effecting exports in other economies, which need export stimulation to promote growth. So these nations have been and will be forced to intervene to sell their own currencies.
And this war is likely to continue until QE ends, at which point the markets should sort themselves out.
It is difficult to get excited right now about the markets as they are ultimately strangled by existing and pending intervention; however intervention, in my eyes is more of a stalling process as opposed to remedial process; so as always the markets will move again. In the meantime, equities, bonds & commodities remain strong; precipitated by a weak dollar. When (if) the dollar reverses and strengthens then corrections are inevitable.

Prospect of US QE2 next month pushes commodities higher, across the board.

Gold just fell short of $1400/oz last week, and is likely to trade sideways until confirmation of stimulus is official from the Fed, due to meet on November 3rd.

However Gold is not the only commodity to remain strong. Copper rallied 0.6% to $8,492/mton, the highest level for over 2 years; fuelled by depleting stockpiles globally. Domestic demand in China for silver may result in a dramatic drop in exports to the rest of the world, pushing prices higher. And last week, Palladium also climbed to a nine year high. Even agriculturals advanced yesterday, following recent declines.

Strength across the mining sector, only makes global mining leader BHP Bulletin more attractive, along with rival Rio Tinto, which are both likely to remain high up on the ‘buy’ lists of many commodity analysts.

But we must remember that QE2 is firmly in the price of both commodities and the major currency pairs; so caution should be shown, as further economic stimulus materialising from the US next month, will no doubt underpin recent gains, but may result in some profit taking and therefore choppy trading conditions.

All eyes on Bernanke

Markets are heavily focused on Bernanke’s statement due later loday. Its all about QE2 and whether the US is going to continue to pump money into the system and buy its own government bonds in an attempt to keep interest rates low and therefore stimulate its own economy; much to the dissatisfaction of the rest of the world, who see their domestic currencies strengthen, weakening their exports and strangling their economic growth. Its difficult to see how all this intervention is actually going to work, because any short term gain, is probably going to be at a cost i.e. inflation which may be difficult to control with all that extra money in circulation. As far as the markets are concerened, the EUR/USD surges further above 1.41, and may have one more move up following a QE announcement from Brenanke later. The dollar has been weakening for several weeks now and maybe this is a situation of ‘buy the rumour..sell the fact’, in that the dollar may turn around after the dust has settled from this evening’s statement. Markets should certainly be quiet until then…

Fibonacci retracement on the EUR/USD

Despite an unsettled Eurozone, the EUR/USD has moved in a straight line from 1.1874, which traded at the height of the crisis in June of this year, all the way up over 1.40 last week. As a technician, I am conscious that this current level is a 61.8% Fibonacci retracement from the 2009 high to the 2010 low, which may precipitate in stern resistance. With hints of renewed woes in Europe, spurred by the recent Moody review of the Irish bond market with potential downgrades possible, current high levels in the Euro would present an opportunity for capitalising on the re-emergence of euro weakness.
Admittedly the rally has been spurred not just by euro strength but also dollar weakness and I certainly remember when we were trading down on the lows below 1.20 that people were talking about ‘par’ trading soon. Most of the market were probably short at that point, and are most likely closed out by now, paving the way for retracement back from this key Fibonacci retracement level; possibly even making new lows should there be a double dip in the euro sovereign debt crisis.

FTSE breaks out to the upside

The FTSE 100 Index starts the day breaking higher above an important key technical resistance level at 5640 (cash/daily rolling). This break out should push the market higher, as the range traders seek to cover any short positions. This technical breakout has a target level of just short of 5800; however true confirmation of the breakout is often only recognised if the market actually closes above  any resistance level. With no major economic numbers out today,  traders will be waiting until tomorrow for UK industrial production and manufacturing output.