A note on yesterday's US Retail Sales

Per-Erik Karlsson from Avantage Financial GMBH at 11/18/09

S&P 500 futures traded within a very tight range of 9 points today and closing up 1.25 points, basically flat. We are still looking for a confirmation of the breakout above 1104 in the form of a wide up bar closing on the highs on increasing volume. A noted yesterday we think this price pattern have to appear within the next 3 sessions or so to avoid a pullback. Volatilities in equities and FX options are dropping further today after the market looks confident that the down side has been blocked out for the near term. The VIX has drifted towards the 20 level over the last 3 sessions as we expected, but if we get below 21 we would look to try a long again as we think the VIX looks cheap towards 20 as we are still not convinced this recent rally will be sustainable toward the year end. Bernanke out talking up the USD in his speech in NY yesterday, which is unusual as it is normally the Treasury that is responsible for the USD so to say. Bernanke also signaled that rates would stay at exceptionally low levels for an extended period. We don’t expect USD to strengthen much unless interest rates are raised or if a stock market selloff would trigger a short squeeze/reduction in risk appetite. A note on yesterday’s US Retail Sales, it was up 1.4% for October, but September was revised down, so all in the number was not as good as the headline number implies. It is rather important that the revisions on the economical data releases are for the better and not worse going forward. Anything else would signal a weak recovery and trouble ahead. We pay attention to this specific trend going forward. Although the bullish sentiment seems to be firmly in place in equities, Dow and S&P moved off highs quite quickly yesterday following Meredith Whitney’s comments on CNBC yesterday, saying “I have not been this bearish in a year". She also reiterated that banks will need to raise more capital and believes there will be a double dip recession in 2010. We agree on this outlook in general, the only problem at the moment is that price action is bullish, so until the price action gives a clear bearish signal it is wise in our opinion to stay long or on the side lines and not short at least, cause remember that markets can stay irrational longer than you are solvent. Yield spreads have moved against the USD over the last sessions and interest rates are falling in the US and the 6 month USD LIBOR is now below the 6 month JPY LIBOR (first time in 16 years). We maintain our view that JPY has limited scope for a very strong rally as BOJ will most likely step in and prevent the JPY from moving much below 87 vs. USD. Remember that Toyota was out last week saying that if JPY got stronger they had to move their production abroad. We can mention it again as we have done over the past few months, Japan has really weak looking fundamentals with ageing population, weak domestic spending, huge public debt and now a strong JPY. That is not a good mix to have in our opinion and it is unlikely that JPY can sustain a substantial rally when the fundamentals are that bad. We expect AUD to continue to perform strongly and dips to be supported as other Central Banks are still clearly behind RBA in the tightening. Although the RBA November meeting minutes out overnight was a bit mixed and not as hawkish as we had expected and gave some doubt to how fast rates will be raised. GBP recovering as the sell off following last week’s BoE inflation report looks all gone and breaking above last reaction high at 1.6799 today, which is technically bullish. We look to sell GBP across the board if it can rally a bit higher. Comments out from RBNZ that the current NZD strength is unsustainable over last few days. We agree and are once again looking to get short in NZD vs. a basket of AUD, EUR and CAD. NZD did fall in sync with AUD a bit today, but still way overvalued in our opinion. Gold marching towards 1150 now and it is truly overbought now and we see overhead trend channel resistance coming in at 1167 today. Stories continue to circulate that Central Banks will once again be net buyers of Gold and producers projecting supply shortages. Keep in mind that the high in Gold back in 1980’s adjusted for inflation would be around 2000 USD/OZ now. Crude rallying strongly on increased risk appetite yesterday, but no doing much in today’s session. We note that crude has not been able to break above 80 USD per barrel for a week now. That basically shows that Crude is relatively weak in comparison to the S&P, which made a new yearly high yesterday. Still Crude has good support down at prior breakout level of 75 USD per barrel and looks range bound with range being 75 to 82 for now. Interesting comment from IEA’s Executive Director Tanaka saying that there has not been much actual demand for oil in OECD countries. He also pointed out that the speed of the global economic recovery may not justify a Dec output increase from OPEC. See article on EADS getting hit by strong Euro, we expect to see more of that going forward as companies start doing business at the current rate. Remember that there is always a sizable lag in the exchange rates companies operate at due to hedges and longer term contracts. Meaning that Euro zone companies might still be operating with a Euro rate that is much lower than the current rate, but when companies will have to re hedge and get new contracts the real rise in Euro will affect their pricing ability and sales. That is when we will start seeing the effect of the current Euro rate on corporate earnings and sales.

Technical’s

Euro: Failed to get above 1.50 again overnight and dipped down to 1.4805. The range is 1.48 to 1.5060 for now and need to see a break out of this range to trigger a more directional move. Long term rising support from March this year is coming in at 1.4717 today, so technically bullish above this trend line.

Cable: Big bounce from 1.6660 level and breaking the 1.6800 level, which opens for a test of the yearly high at 1.7043 from August.

USDJPY: Has been trading inside the falling trend channel since March 09, with overhead resistance at 92.11 and support at 86.53. We see limited scope for JPY to go below 86 and favor longs on dips, however need a daily close above 92.50 to really open the upside.

Swissy: Bearish below 1.02 and need to break 1.00 to extend the drop. Overhead resistance coming in at 1.0246 this morning (falling trend line from 30 Jul 09)

AUDUSD: Still trading inside the rising trend channel that has been in place since 13th of July 09. The rising support of this trend line is down 0.9054 today with overhead resistance at 0.9586. Key support is 0.9212 today, which is Thursday’s 12th of November low.

USDCAD: Bearish below 1.09 and this level held the rally, key support down at 1.02. A note, 1.0435 is minor support level, which was the breakout level on 20 October for the rally to 1.0869. Minor resistance at 1.0590.

EURJPY: Struggling to stay above the 135 level and looks more range bound inside the key resistance of 138.72 and support down at 131 (2 Nov. low). Short term rising support (from 2nd of October low) coming in at 132.18 this morning as well.

GBPJPY : Key levels remains 147.80 support and 153.30 resistances. Short term rising support at 149.50 today, so to keep upside potential going it needs to close above this level today.

AUDJPY: Mixed signals from RBA overnight on the December rate hike leading to some weakness in AUD and would not be surprised to see more profit taking in AUD over next few sessions. Key support at 83 was also broken, meaning it can test 82 over next few sessions. Minor support at 82 and overhead key resistance is the yearly high at 85.31