With respect to the corporate news coming out of Band of America which earnings fell short of expectations the US major indexes DJIA and NASDAQ were most in negative teritory and staged a late rally to close in a not very impressive manner:
However the markets are still holding above the psychologically important levels like 13 700 in DJIA and 1500 in S&P. Here is a Daily chart of S&P with extrapolated DJIA. Clearly is seen the turnaround signalled by the MACD cross to the downside along with the crossing down of the 20 day Moving Average which has provided Support from the September lows.
The real question however remains if the deteriorating strength in the US Dollar is leading or in other words supporting the stock markets performance. Given the severe consequences of the Sub-prime credit crisis has on Retail consumption and the Housing sector we can still see strength in the major Indices. That can be be directly attributed to the Fed rate cut which boosts corporate earnings while making the US exports more competitive through the weak US Dollar.
A fine example is the next chart which clearly illustrates the direct correlation between the US Dollar index (USDX represents the value of the US Dollar in terms of a basket of six major foreign currencies: Euro (57.6 %), Japanese Yen (13.6 %), UK Pound (11.9 %), Canadian Dollar (9.1 %), Swedish Krona (4.2%) and Swiss Franc (3.6 %) and the Dow Jones Industrial Average:
Direct relation to the weakening of the US Dollar of course is the recent record prices in Crude Oil - November contract is trading now at NYBOT above 88 USD per barrel. Consequently the Gold has reached a High of 769 USD per ounce in the NY Session.
The following daily chart shows that the Gold uptrend has been really steep and such a move definately can't be sustained with a pullback to the 720 area seen as imminent.
Certainly the bullishness is not gone with the Directional Movement indicator wide open and the ADX which measures the Strength of the trend well above 40 (ADX at 48.64). However this also can be used as a contrarian signal since the trend is at its High from the start of the year. Other technical point is the 20 day Moving Average that provided support around the 725 level is now at 742 and will exert a ceratain attraction to the spot price. Once broken it will put to risk the last support at 725 - and then the double peaks(Feb High & April High) around 708. The timing her however is essential as the momentum of the trend has not yet given a definitive sign of exhaustion.
Other elements of risk in the short term of course are the G& meeting this Friday and the comments from from Chinese central bank chief Zhou Xiaochuan indicating that more policy tightening will be needed to cool the overheating Chinese economy. Both events have exercised their effect on the overly popular theme of Carry trades (Borrowing in low interest rate currency like Japanese Yen or Swiss Franc and lending in High yielding currencies like the Australian or New Zelland Dollars).
The paring of carry trade positions in the start of the week however has not been so disruptive as the previous unwindings we witnessed in February and August. The EURJPY now at 165 is still looking to challenge the July all-time High at 169 and the recent correction can be seen as a healthy pullback with various technical indicators showing a high probabability of the uptrend to remain intact.
Other barometer of the Carry trades is the AUDJPY - boosted by the flight of the Gold price the Australlian Dollar as a commodity currency is strongly influenced by the Gold mining industry performance and the Spot Gold price respectively. Take a look at the Daily AUDJPY chart:
The July High around 107.70 is clearly in focus until we have a definitive pullback below thw 20 day Moving Average (The Green average on the price chart). However the steep uptrend is still intact as the recent pullback has is testing the Rising Support trendline that connects the August and September Lows (The Green diagonal line). Technically the DMI is bouncing off and this might soon signal uptrend renewal - especially if the MACD which is soaring and thus supporting the bullish scenario doesn't fall.
Logically the USD weakness is the focus until the G7 meeting. There is always a risk of specific comments regarding the exchange rates and that's why players hedge themselves by unwinding their positions prior to the meeting until they have a better view on the prospects of the carry theme. Previous G7 meetings have vaguely signalled the overall concerns over the slow appreciation of the Chinese Yuan and the global imbalances created by the extremely low interest rates maintained by the Bank of Japan (0.50%). The massive liquidity created by the BOJ has been used in the recent years to finance the Bull run in the US and European stock markets. Daily charts comparing the S&P500 and the USDJPY price show a clear correlation and this calls for a policy of a smooth tightening of te Yen liquidity because it poses a threat to the global financial system in case the majority of the big funds rush for the exit at one time.
Similar case to remember is the 'Russian default crisis' from the fall of 1998 when the USDJPY dived from a High at 147 to a low of 111.60 in 3 months. Back then we had exactly the similar credit crisis but also for the firs time we had the Long Tern Capital Management fund under the management of 2 Nobel prize winners go bust. Only the timely intervention of the Feb by easing the interest rates and the concerted buyout of the LTCM fund by a pool of the major investment banks saved the day.
Given the weakness of the US Dollar now we also have to keep an eye on the possibility of financial crisis that will start the 'Flight to quality' - exiting positions in the stock markets and buying US Treasuries. Such Liquidation markets might well return the US Dollar index back above the psychological 80 level.
Certainly the US Dollar weakness will remain the leading theme for some time but it is important always to be cautious because it is then when the last Dollar Bull has surrendered when the US Dollar uptrend will resume. Remember that once you have all the participants believing in a one-way market (or bet) then going against their positions is actually going in the most vulnerable direction and thus will produce the best trading results as the bid will be vurtually nonexistent.