Australian Dollar Morning Report - Aussie bounce strong, US weak as eyes turn to Fed

Stocks were higher again in the US and Europe with US stocks in particular benefitting from better than expected reports by Pfizer and Oil refiner Valero combined with the strong rise in the Case Shiller home price index of 5.5% more than offset the very weak consumer confidence data for January which fell to 58.6 from 66.7 in December and against the expected level of 64.

But equally we could argue that the rally in US stocks is not only in spite of weak consumer confidence but also the poor results from Ford which was both concerned about volumes generally and its European operations specifically.

The best thing to say is that this is still a relief rally and the onus is on the bears to make the case. For me it is a simple case of pessimism fatigue - we see this in markets all the time and the fact the world didn't end and the data has been printing a little better in Europe in particular aided and abetted by the Fed's bond buying is driving stocks everywhere higher. I have done a piece this morning looking at all the stock market indices I follow and which in the run up to the FOMC announcement tomorrow morning might help tell if they are overdone - you can find it here.

But lets look at what is going on in Europe because it is both instructive insofar as explaining market psychology for stocks and the Euro's recent outperformance to the US dollar. The chart below is of the Citibank European Economic Surprise index from Bloomberg and the database we share with our colleagues at MacroBusiness.

You can see the sharp rise in the red line on the right hand side of the chart which reflects the fact that European data has recently surprised sharply to the topside. In November the Euro Eco Surprise low was -34.4 while as of last week it was +66.5. So it's not hard to understand the Euro's bid tone or the continuing relief rally in European stocks and for European sentiment.

The Fed is a big risk to this rally however tonight if they hint at a withdrawal of stimulus or if there are too many dissenters from whatever decision they make. But this is also the first meeting of the 2013 FOMC membership which on the face of it appears more dovish than the FOMC membership was in 2012. So we'd be surprised if there is any deviation from its bond buying program just yet - or even any hint.

Stocks

Turning to stocks the FTSE hit another mulityear record which from where we sit watching the UK economy sink into the mire, watching the Citi Eco Surprise index sink from +80 in November to -27.6 last week we wonder how this is occurring but then again the Fed's buying and the Euro relief rally are lifting all boats.

At the close the FTSE was up 0.71% to 6,339, the DAX rose 0.20%, the CAC was up 0.14% and Milan and Madrid were roughly unchanged.

In the US as discussed competing company reports were resolved in the favour of the bulls in the blue chip sector with the Dow up 0.48% to 13,949 and the S&P 500 up 0.45% to 1507 and within striking distance of the all-time high. Is it stretched or are we on the verge of the new bull market - my trend following systems are long but as noted in this morning's other piece it might be cheap to buy some puts at the moment.

In Asia yesterday the Nikkei was up 0.39%, Shanghai rose 0.53% but the Indian and Singaporean markets were both lower falling 0.56% and 0.42% respectively.

Global FX

Euro rallied again overnight but has not been able to push through the 1.05 region just yet making a high of 1.3496 from the low of 1.3413 to sit up 0.26% at 1.3489 this morning. GBP had a better night of it as well up 0.4% to 1.5756. This is a very good performance after a low of  1.5683 and the rally of 90 points roughly to 1.5772 suggests that GBP is trying to base. A move through 1.5785 is however needed to confirm.

The Aussie had a good bounce after a rough ride last week and candlestick aficionados will just love the pattern for a base from Monday's trade. Having made a low at 1.0401 the Aussie sits up 0.45% at 1.0461 and just below the high of the past 24 hours of 1.0470. USDJPY had a 70 point range and sits at 90.68 down 0.17% on the day.

Looking specifically at the Euro it feels like the next 24 hours are going to be make or break for the rally that is currently underway. The flow of economic data is in favour of the Euro at the moment and all that might be needed is a dovish statement from the Fed to kick it sustainably through 1.05 and through the reverse head and shoulders pattern - this would be very bullish for Euro.

Shorter term support for the Euro is 1.3460 and then 1.3404/14.

The Aussie has based nicely as noted above and yesterday's reversal was a very strong one technically with what looks to us like a morning Doji star but also yesterdays price action completely reverses Friday's weakness. The 4 hour charts likewise suggest further topside with a run toward 1.0492 and probably through 1.05 in the next 24 hours.

Commodities

Crude was up again rising 1.02% to $97.46 and only 58c Bbl below the September high. Gold bounced, kind of anyway it was up 0.50%, an old trendline we have on our charts and which has given support on a closing basis since the lows in late December. Silver continues its role as the high beta precious and rallied 1.31% overnight to $31.06 oz.

Cotton rallied hard again up another 1.67% but Sugar reversed falling 2%. Corn, Soy and Wheat were within 0.2% up and down of flat.

Data

Building permits in New Zealand and then Japanese retail sales today before Spanish GDP tonoght in Europe. Business confidence in Italy is to be released and then Mortgage approvals and Consumer Credit in the UK before the Portugeause and Eurozone confidence data is released. But in truth nothing matters until the Fed and the US preliminary GDP data is released.

Could be an interesting night. 

Catch me on Twitter @gregorymckenna or @FX_Global