FOREX.com's Weekly Strategy

11/08/2009 - Risk assets are levitating a la Wile E. Coyote

Fri, 06 Nov 2009 19:00:00 GMT

* Risk assets are levitating a la Wile E. Coyote
* G20 and Eurozone Fin. Min.'s may lend USD verbal support
* Bank of England set to revise up near-term inflation forecasts
* QE could be phased out by February
* Somber US employment report makes for ominous outlook
* Key data and events to watch next week

News that the US unemployment rate rose to a 26-year high of 10.2% failed to dent risk appetites as seen in stocks, at least in the immediate aftermath on Friday (more on the data below). Commodities, however, did register the pain of rising unemployment and the implicit hit to demand, with the CRB index dropping to its lowest level this month, and now down about 5% from the Oct 21 high. JPY-crosses also responded appropriately to the downbeat labor market news, erasing most of the week's gains. The USD, however, failed to see much strength overall. In a sense, that's to be expected after the Fed reaffirmed its commitment to maintain exceptionally low rates for an extended period of time, a decision which was reinforced by the soft jobs news. But there's also the 'risk on/risk off' correlation, and while stocks managed to rebound, the USD remained under pressure. Full text »

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11/01/2009 - USD Risk rally is done

Fri, 30 Oct 2009 19:00:00 GMT

* Risk rally is done
* Fed speculation is misguided
* Earnings still little to write home about
* US unemployment to hit 10% in October
* More QE from the BoE on the cards
* Sterling particularly vulnerable if PMI services disappoints
* ECB could be on the point of reining in enhanced policy measures
* Key data and events to watch next week

Last week's lead bullet point was that the risk rally had stalled, for the moment. Lacking any solid technical indications of a reversal, we could only highlight potential for an upcoming correction in risk assets. This week, however, we have no such hesitation and a plethora of technical evidence that a multi-week top in the risk rally has been made. Ultimately, this should be USD supportive, given recent high correlations and excessive USD short positioning. However, the real driver of USD weakness is near-zero US rates, which will not be changing anytime soon. In light of that, the USD recovery should not be in a straight line, but rather fraught with continued choppiness. As a result, we will look to buy the USD on dips in the weeks ahead against all but the JPY. The JPY remains the primary funding currency, and barring a collapse in US rates in the weeks ahead, this should remain the case. As such, we will also look to re-sell JPY-crosses (EUR/JPY, AUD/JPY, GBP/JP, etc) on any rebounds, and the JPY-cross decline is likely to be the most pronounced FX outcome of any risk unwind. Lastly, the outlook for gold remains somewhat confused, given the various forces at work. But our preference is to be sellers while it holds below the 1070/75 area, and we will become more bearishly convinced on a daily close below the 1025/27 level, targeting a move lower to 970/980 initially. Full text »

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10/25/2009 - Risk rally stalls for the moment

Fri, 23 Oct 2009 19:00:00 GMT

* Risk rally stalls for the moment
* Sterling set to remain on the defensive
* Earnings still show little organic growth
* Treasury auctions again in focus
* Key data and events to watch next week

Despite the crescendo of USD negativity this past week (e.g. CNBC devoted a full day's worth of programming to the weak dollar theme), the greenback actually held up pretty well, while the JPY struggled further as the biggest loser. On the week, the USD is better against the JPY, GBP, and CAD, and slightly weaker against AUD, EUR, NZD, CHF, gold and silver. Perhaps interestingly, EUR/USD broke above the psychological resistance level of 1.5000, made little progress and looks set to close just below it for the week. Eurozone finance ministers and ECB President Trichet did their best to talk down EUR/USD, but the market paid little attention. Cable experienced a massive rejection from a break above its Ichimoku cloud on strength early this past week and looks quite vulnerable (see below). CAD went on a roller coaster ride, but ultimately fell against the buck on more strident warnings from the Bank of Canada against further strength. BOC Gov. Carney used the "I" word (intervention) and traders reacted for the time being with further short-covering in USD/CAD. We are cautious that markets will continue to heed the BOC threat, but excessive USD-short positioning there may see further gains toward the 1.09-1.10 area, where we would reconsider selling USD/CAD. The 21-day sma at 1.0550 may be the trigger higher, and a daily close above would be bullish in our view. Full text »

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10/18/2009 - USD still falling, risk still rallying

Fri, 16 Oct 2009 19:00:00 GMT

* USD still falling, risk still rallying
* Price action beholden to EPS over next two weeks
* GBP rallies ahead of BOE minutes, 3Q GDP
* EUR strength a topic for Eurozone finance ministers
* Key data and events to watch next week

The greenback lost fresh ground to near 14-month lows, as stocks, commodities and other risk assets continued their ascent, but the JPY emerged as the biggest loser on the week. As suggested in last week's report, JPY-crosses re-connected with risk appetites and saw some of their biggest gains in months after languishing for the last several weeks while the focus was on dollar weakness. With US Treasury yields sustaining recent gains, the JPY is likely to continue to act as the primary funding currency for risk speculators, perhaps giving the USD some breathing room, if only in USD/JPY. Corporate earnings are likely to remain the key driver (see below), however, and any dollar recovery is only likely on disappointing reports or economic data. Sentiment remains extremely USD negative, and dovish FOMC minutes reinforced concerns over the strength of the US recovery. More importantly for the USD, discussion among Fed officials over extending the size of the Fed's asset purchases (quantitative easing) added yet another reason to sell dollars. Markets appeared to be expecting the Fed to wind down its asset purchases, so the FOMC discussion came as a surprise. Full text »

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10/11/2009 - Dollar stays weak, but holds key levels

Fri, 9 Oct 2009 19:00:00 GMT

* Dollar stays weak, but holds key levels
* US retail sales and consumer prices in the crosshairs
* UK CPI may upset cable
* Eurozone sentiment and EUR strength

The financial media was all atwitter over USD weakness this past week, but the buck managed to hang on despite reports of its imminent demise. The greenback got off to a weak start after a less than supportive G7 statement retained the same language on FX as the April communiqué, rather than a more strongly worded vote of confidence. The dollar then took a beating on the back of a report by a prominent UK journalist that secret meetings between mid-East oil producers and Russia, Japan, and France, among others, were held to discuss pricing oil in a basket of currencies, including gold, and not in US dollars. Those reports were later denied by most of the countries mentioned, but the dollar continued to slide, while gold prices surged higher to new all time highs of around 1061/62. USD sentiment remains undeniably bearish, excessively so in our view, but it's important to note that the USD tested key support levels (EUR/USD key highs at 1.4850/70; USD/JPY 88.00; and US dollar index at 75.80/90) and ultimately held. Full text »

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10/04/2009 - Has the risk rally finally turned?

Fri, 2 Oct 2009 19:00:00 GMT

* Has the risk rally finally turned?
* Weekend event risk--G7 meeting/Irish EU vote-update coming
* EU Referendum could see significant EUR/USD volatility
* Bank of England and ECB previews
* US continues to be plagued by job losses
* Key data and events to watch next week

The short answer to that is a definitive, unequivocal 'maybe.' The first day of October saw risk assets take a beating for apparently no good reason. True, weekly US jobless claims rose and the ISM manufacturing index disappointed, but we knew from the Chicago PMI that ISM was likely to be weaker, and the jobless claims was not a major jump. Complicating matters further, we had month/quarter-end to contend with the day before and Sept. NFP the day after Oct. 1. Overall, though, we are left with the impression that October has begun on an inauspicious note for risk appetites and risky assets, such as stocks and commodities. If so, we could see further USD strength and potentially signal a multi-week USD low was seen a few weeks ago. Full text »

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09/27/2009 - Increasing signs the risk rally is stalling

Fri, 25 Sep 2009 19:00:00 GMT

* Increasing signs the risk rally is stalling
* Mixed signals from Japan's MOF
* Still a troubling trend in US economic data
* GBP gets thumped by the BOE
* Key data and events to watch next week

Following last week's preliminary signals that risk assets may be stalling, this past week saw stock markets lose ground, key commodities reverse gains, and the USD bounce after testing key support levels. To be sure volatility remained high during the week, with new risk highs being made, but weekly closing indications increasingly suggest a peak in key risk markets has been seen. There were a number of data disappointments (see below) that worked to soften risk appetites, but attempts to extend the rally ultimately failed out of exhaustion. This was most evident following the FOMC's largely as expected statement, which noted that economic activity 'picked up' and that the Fed would maintain extremely low rate levels for an extended period. Those comments should have and did lead to a rally in risky assets, but, importantly, those gains could not be sustained and most finished down on the day. Full text »

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09/20/2009 - Increasing signs the risk rally is stalling

Fri, 18 Sep 2009 19:00:00 GMT

* Increasing signs the risk rally is stalling
* Mixed signals from Japan's MOF
* Still a troubling trend in US economic data
* GBP gets thumped by the BOE
* Key data and events to watch next week

The greenback remains under pressure as the global risk rally continues. Concerns over the US fiscal deficit, the status of the US dollar as the primary global reserve currency, and near zero US interest rates all provide background noise to encourage USD selling, but the real source of USD weakness is the ongoing improvement in risk appetites globally. While we strongly believe that current risk asset market gains are overdone and ripe for a correction, solid indications of a pullback are tenuous at the moment. However, we would note that the ratio of the S&P 500 to its 200-day moving average is at historic extremes last seen in May of 1983, which was followed by a 2.5% decline in the following week. Full text »

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09/13/2009 - Irrationality dominates and the USD suffers

Fri, 11 Sep 2009 19:00:00 GMT

* Irrationality dominates and the USD suffers
* US bond market not flashing risk taking
* Gold push higher has no legs

Headlines dominated the week and the news was deemed decidedly US dollar negative. Calls from the UN for a new global currency to replace the dollar dovetailed with musings from a top member of the Chinese hierarchy that the country is alarmed by US money printing. If that wasn't enough, President Obama asked the Senate to raise the federal debt limit to $12.1 trillion by mid-October - raising more deficit concerns - and the World Economic Forum's global competitiveness report showed Switzerland knocking the US from the position of world's most competitive economy. In broad terms and as we write, the US dollar has given up -1.8% on the week. Full text »

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09/06/2009 - The USD bounces back from the brink

Fri, 04 Sep 2009 19:00:00 GMT

* Still looking for risk aversion to dominate
* Long-term CAD fundamentals positive
* G-20 likely to see more talk than action
* Bank of England set to stay cautious
* German export data should show signs of improvement

We look for the inter-market correlations that have prevailed throughout 2009 but broke down into the latter part of the summer to resume. We've seen some of this in the first week of September, with higher EUR correlating with higher stocks and commodity currencies. The market seems to be in the process of putting in a short-term top as better than expected economic data of late have failed to elicit any material extension in equities. The more than 50% rally off the lows in the S&P is unsustainable in our view and we would expect a China-like correction in US stocks in the weeks ahead. Full text »

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08/30/2009 - The USD bounces back from the brink

Fri, 28 Aug 2009 19:00:00 GMT

* A note on end of summer conditions
* Is this as good as it gets?
* Japanese election this weekend
* Details will matter in ECB and RBA rate meetings
* Key data and events to watch next week

Next week sees both month-end and a likely end to summertime trading conditions, both of which have the potential to generate heightened volatility. On Monday, Japanese election results (see below) will start the ball rolling, but liquidity will be hampered midday by the UK Summer Bank holiday which will see most of London absent. NY afternoons will likely remain thin as the US Labor Day holiday on Monday Sept. 7 leads to thinner interest than normal toward the end of the week. At the same time, summer will be ending for many asset managers and an increase in position adjustments may begin from Sept.1. Lastly, Friday will see the August US NFP report, always an important catalyst for volatility. Full text »

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08/23/2009 - The USD bounces back from the brink

Fri, 21 Aug 2009 19:00:00 GMT

* Risk rebounds and the buck wavers
* Higher JPY-crosses likely on improved outlooks
* Improvement in US housing and employment crucial for confidence
* Key data and events to watch next week

The risk pullback we were looking for this past week proved exceptionally short-lived, with an opening dip at the start of the week giving way to yet another rebound by the end of the week. Stock markets stabilized after an early scare out of China and the S&P 500 managed to make minor new highs for the year, along with oil prices. Not all inter-market signals were in agreement as the broader NASDAQ nearly stalled below its highs, the USD (US dollar index) staged a decent bounce from above its lows for the year, and JPY-crosses were nowhere near their recent highs. This lack of confirmation from other markets keeps the FX outlook tentative to say the least, but the risk bounce did have some decent fundamental underpinnings, though it remains heavily driven by sentiment. Eurozone ZEW sentiment, Eurozone PMI's, the Empire and Philadelphia Fed indexes, and US existing home sales all surprised substantially to the upside. Upbeat observations from Fed Chair Bernanke sealed the deal and sent risk assets even higher. Bernanke was not unequivocal in his optimism, citing a likely slow recovery and only a gradual improvement in unemployment. ECB Pres. Trichet was blunter, expressing irritation at talk of green shoots and adding that a lot of work is still left. Full text »

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08/16/2009 - The USD bounces back from the brink

Fri, 14 Aug 2009 19:00:00 GMT

* Risky assets may come under increasing pressure, but...
* That's what we've been waiting for
* BoE minutes due Aug 19, not much room for surprises
* German and France grow in Q2 but PMI still showing contraction
* Key data and events to watch next week

The USD finished out this past week virtually unchanged from week-ago levels against most other currencies, excluding the JPY. To be sure, there was healthy intra-week volatility in most USD pairs, but the key take-away is probably that the USD rebound following last Friday's July NFP report was largely sustained, adding further weight to the idea that the USD has made a significant medium-term low. The other prominent result of the week is a more decisive turn lower in many of the so-called risky assets. USD/JPY most clearly surrendered all of its post NFP gains and continues to trade in near lock-step with US Treasury yields, which also gave back the bulk of their gains from last week. With the USD unchanged against most others, but down sharply against the JPY, the carry trades (JPY-crosses) have posted bearish engulfing patterns on the weekly candlestick charts, which typically warns of further losses ahead. Outside of FX, stocks continue to stall below key Fibonacci resistance at 1015/1020 in the S&P 500, while oil also looks to have more decisively given up on attempts to extend gains beyond the year's highs around $73.00/50. The recent strength in gold prices also looks to be losing steam after having topped out below key technical resistance in the $975/980/oz area. Overall, though, FX and many other assets remains trapped in recent ranges... Full text »

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08/09/2009 - The USD bounces back from the brink

Fri, 07 Aug 2009 19:00:00 GMT

* The USD bounces back from the brink
* Growth outlook may overtake sentiment as the driver
* BOE expands asset purchases, raising inflation fears
* Key data and events to watch next week

The past week was characterized by the USD breaking down below its lows for the year against other major currencies (excluding JPY), only to come roaring back on a better than expected US July employment report. At the end of the week, the greenback was back inside the ranges that have dominated the summer so far, and our suggestions to sell EUR/USD near to 1.45, sell GBP/USD near to 1.70, and to sell AUD near to 0.85 look to have played out well. Normally, when a range break in one direction is not sustained, markets will reverse and test the other side of the range. However, Friday's rebound in the USD was largely driven by US bond yields surging higher (10 year US Treasury yields gained nearly 40 bps on the week), and if that's the basis for further USD gains in the near-term, we're not especially optimistic. Full text »

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08/02/2009 - USD back to the brink, again

Fri, 31 Jul 2009 19:00:00 GMT

* USD back to the brink, again
* US economy showing signs of a pulse
* BoE MPC--market speculates on the future of QE
* ECB meeting-- 'Enhanced Credit Support' the focus
* Key data and events to watch next week

A volatile week brought July to a close and the USD finished out on the low-side of ranges that have dominated currency markets for the last two months. We are reluctant to make too much of Friday's USD decline as it was likely heavily influenced by month-end portfolio hedging flows against a backdrop of reduced summertime liquidity. (As stocks in the US have risen in July, foreign asset managers need to sell more USD to hedge against higher US portfolio valuations.) After months of range-bound trading, FX markets are certainly overdue for a directional break-out. The overriding dynamic remains risk sentiment, and risky assets (stock, commodities, and JPY-crosses) rebounded sharply in tandem with USD declines, potentially setting the stage for a USD breakdown/extended gains in the JPY-crosses. However, we would note that the most of the USD lows for the year remain intact (AUD/USD high is the exception), as do the highs in the JPY-crosses, despite new highs in most stock indexes. Last week we cautioned that currencies were not confirming the risk embrace seen elsewhere, and while we maintain that view, we also have to reckon with a range breakout at some point.... Full text »

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07/26/2009 - FX risk trades not confirming stocks rally

Fri, 24 Jul 2009 19:00:00 GMT

* FX risk trades not confirming stocks rally
* China-US talks to put USD back under scrutiny
* Risk rally really long in the tooth
* GBP softens, BoE QE risk sees some revival on weak data
* Key data and events to watch next week

Stock markets continued to outpace gains in other risky assets, with shares breaking to new highs for the year on the back of a series of better-than-expected 2Q earnings reports. We are extremely skeptical of the sustainability of the current rally in stocks, based on both the fundamental outlook (see below) and the lack of confirmation seen in other risk asset markets. Among key markets failing to make new highs for the year, the CRB commodity index, oil, 10 year US Treasury yields, gold, and the Baltic Dry Index (a proxy for commodity demand) are all well below their highs for the year... Full text »

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07/19/2009 - Risk on/risk off see-saw continues

Fri, 17 Jul 2009 19:00:00 GMT

* Risk on/risk off see-saw continues
* Important price levels to watch
* Expecting verbal intervention in BOC meeting
* BoE minutes may shine further light on QE outlook
* UK Q2 GDP report due on July 24, should confirm stabilisation
* Key data and events to watch next week

After a couple of weeks of 'risk-off' trading that started the month of July, risk appetites bounced back this past week largely due to better than expected earnings reports in the US. The rebound, however, follows a similar pattern extant over the last few months: investor sentiment improving on the back of data/news that on its surface suggests recovery, but on closer inspection is riddled with holes. Take bank earnings, for example. Off the top, we would observe that bank profitability in the current environment does not necessarily translate into improvement in the underlying real economy... Full text »

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07/12/2009 - The reflation trade is under pressure

Fri, 10 Jul 2009 19:00:00 GMT

* The reflation trade is under pressure
* JPY strength raises intervention risk
* Bank earnings and implications for the US dollar
* UK CPI outlook could determine course of quantitative easing* Key data and events to watch next week

Risk aversion reappeared with a vengeance this past week, in a follow-on move after the weaker than expected US June NFP report undermined prospects for an imminent economic recovery. Rather than a series of weaker data reports as the catalyst, it appears to be more a case of a growing shift in sentiment aggravated by crowded 'long risk' positioning. To be sure, there were some data disappointments (UK May industrial production fell; lower trade levels reported by China and US; softer US and Eurozone sentiment gauges, to name a few), but the timing of the moves suggested technicals and positioning as the primary catalysts... Full text »

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07/05/2009 - What if the G-8 discuss the USD next week

Fri, 03 Jul 2009 19:00:00 GMT

* What if the G-8 discuss the USD next week
* Focus back on risk as US earnings season kicks off
* Steady rates expected from the BoE, risk for a step up in the asset purchase plan

We got some mixed news out of China this past week with regards to the US dollar's reserve status and the potential for it to be discussed at the upcoming G-8 Summit on July 8-10. On Wednesday we saw headlines that China has asked the group of eight to discuss potential reserve alternatives to the USD. China and Russia have been the most outspoken in terms of calling for an IMF-backed super-sovereign reserve currency. These comments were promptly denied one day later when China announced that they do not plan any near-term adjustments to their reserve portfolio. The comments sent the buck for a ride, mainly through EUR/USD - the most liquid vehicle when one wants to voice an opinion about the greenback. EUR/USD promptly squeezed up to the week's highs just above the 1.42 mark only to dip back towards the 1.40 area one day later. Thus making it clear that the market's sensitivity to any commentary regarding the USD losing its prominent reserve status remains at an all-time high. Full text »

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06/28/2009 - The never-ending consolidation is about to end

Fri, 26 Jun 2009 19:00:00 GMT

* The never-ending consolidation is about to end
* Most medium-term concerns about the US dollar are overblown
* ECB rate decision outlook
* Key data and events to watch next week

The month of June has been characterized by a seemingly endless consolidation in both USD-currency pairs and in many cross-currency pairs as well, not to mention stocks and other major asset markets. Looking back, it's perhaps easiest to view the consolidation in terms of investor risk appetites and the stabilization in the global downturn. Since March, generally less-worse data has seen risk appetites improve, leading to substantial gains in risky assets like stocks, commodities, and, in FX, higher JPY-crosses and a weaker USD... Full text »

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06/21/2009 - Consolidation may give way to USD rebound

Fri, 19 Jun 2009 19:00:00 GMT

* Consolidation may give way to USD rebound
* SNB stays the course on CHF intervention, for now
* Record US note issuance and Fed meeting in focus
* Key data and events to watch next week

Major financial markets spent another week knocking around in seemingly impenetrable ranges, and FX was no exception. EUR/USD opened the week by testing the pivotal 1.3750 level, only to spend the rest of the week recovering higher, but importantly failed to sustain a break of 1.4000 on several occasions. Cable was wickedly choppy, bouncing between roughly 1.6200 and 1.6500 on multiple round-trips, before closing the week mostly unchanged. USD/JPY showed a bit more direction, but stayed within ranges that have held for the month to date. For the week, the USD index, a gauge of the USD against six other major currencies, looks set to finish out nearly unchanged.. Full text »

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06/14/2009 - USD consolidation as recovery optimism wavers

Fri, 12 Jun 2009 19:00:00 GMT

* USD consolidation as recovery optimism wavers
* Sterling recovers, but could be sensitive to poor data near-term
* US funding concerns overblown, but risks loom
* Key data and events to watch next week

The greenback largely consolidated this past week in a highly volatile fashion as optimism over the prospects of an imminent economic recovery wavered. Stocks remained elevated, but could not make any significant upside progress, while commodities also gained, but showed signs of stalling late in the week. In a paradox, the very optimism that led speculators to ramp up commodity purchases may end up hampering the recovery, as higher food and energy prices are seen to be a major headwind for any consumer-led recovery. In bonds, government yields continued to head higher, posing yet another circuit-breaker to economic recovery, as higher credit costs will restrain consumer and corporate borrowing, and hence spending and investment. Yet another obstacle to recovery is USD weakness driving up currencies in other major economies. Full text »

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06/07/2009 - The worst looks to be over for the USDs

Fri, 05 Jun 2009 19:00:00 GMT

* The worst looks to be over for the USD
* Risk assets remain buoyant, threatening correlations
* The bottom is in for US employment
* Sterling reels under political uncertainty
* Key data and events to watch next week

The USD came storming back this week, with the most impressive moves coming after a 'less-worse' May NFP report on Friday suggested the worst of the job cuts are over in the US (see below). But the USD actually bottomed out earlier in the week after finance officials from China, Japan, South Korea and India indicated their belief that the USD would remain the global reserve currency for the foreseeable future. Those comments followed Treasury Sec. Geithner's trip to Beijing, during which he managed to allay Chinese concerns over US deficits and voice support for the USD, presumably also securing Chinese commitments to keep buying US debt. Fed Chair Bernanke followed that theme in testimony on Wednesday, in which he encouraged Congress to begin to act now to address long-term deficits. On Thursday, both ECB Trichet and Bank of Canada Governor Carney voiced concern over USD weakness, with Trichet solemnly noting the US Treasury's support for a strong USD. These developments removed the pall that had been hanging over the greenback. The icing on the cake was the May NFP report, which initially saw the USD weaken, but massive USD short-covering flows then dominated. Full text »

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05/31/2009 - USD weakness nearing extreme levels

Fri, 29 May 2009 19:00:00 GMT

* USD weakness nearing extreme levels
* Mr. Geithner goes to Beijing
* Data suggest recession still far from over
* A busy week for central banks; the ECB may steal the limelight
* Key data and events to watch next week

The US dollar consolidated for much of this past week, only to relapse into fresh weakness on the last trading day of the week/month. Healthy demand at US Treasury debt auctions and affirmations of US credit ratings by two rating agencies failed to stem the exodus from the USD, as fears that US deficits will inevitably lead to a weaker USD continue to dominate investor sentiment. The weakness in the USD has evolved into a full-blown downtrend, with commodity prices rallying sharply and gold prices finally surmounting the sticky 965/967 level. A vicious cycle of dollar weakness/commodity strength will eventually short-circuit itself, as higher commodity prices would undermine consumer spending and de-rail economic recovery, but not before potentially running further. While we continue to view the medium-term (multi-month) outlook for a sharp rebound in economic activity (see below) as highly premature, the investor stampede to own risk appears similarly highly resilient. Even the looming bankruptcy of the largest US automaker has left recovery sentiment apparently unfazed, but probably only because it has been expected for months now. Full text »

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05/24/2009 - The Greenback gets smoked

Fri, 22 May 2009 19:00:00 GMT

* The Greenback gets smoked
* Poor US note auctions could exacerbate dollar weakness
* On deficits, credit ratings and European banking issues
* Key data and events to watch next week

The US dollar took a beating this past week as safe-haven USD and US Treasury long positions continued to be unwound. The USD's slide was exceptionally rapid and no doubt was exacerbated by relatively thinner liquidity conditions ahead of long-holiday weekends in the US and UK. The last phase of USD weakness occurred on Thursday after the Treasury market was caught long and wrong after smaller than expected Fed purchases and the announcement of a larger than expected Treasury debt issuance next week. USD weakness was widely attributed to fears over the fate of the US AAA sovereign credit rating, after S&P lowered its outlook for UK credit ratings. If you're perplexed why GBP should strengthen after its credit outlook is downgraded, and the USD weakens even as ratings agencies downplayed the prospects of any change to the US ratings, you're not alone. The only consistent theme behind USD weakness is the overall improvement in economic data suggesting that the global downturn is stabilizing, lessening the safe-haven demand for the USD and for US Treasuries. Accompanying themes, such as inflation fears, Chinese machinations, credit rating downgrades, quantitative easing, all provide background noise and fortify what has emerged as a nascent trend. Full text »

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05/17/2009 - Risk rally stalls and reverses

Fri, 15 May 2009 19:00:00 GMT

* Risk rally stalls and reverses
* SNB steps back into EUR/CHF
* US housing still on shaky ground
* Euro and UK data highlights
* Key data and events to watch next week

The recovery in risky assets (stocks, commodities, JPY-crosses/carry trades) has stalled and reversed in relatively short order and our cautious outlook for further gains looks to have been validated. The steady flow of less negative news has given way to the realization that we are now entering a likely extended period of global economic under-performance. The horizon has also become increasingly cloudy, with consumer spending showing signs of ongoing retrenchment, continuing claims still rising (accelerating even), and housing markets still highly vulnerable (see below). The announcement of massive US auto dealership closures and the potential bankruptcy of the top US automaker will only amplify slack in the labor markets, keeping the consumer outlook bleak, and further undermining the outlook for corporate earnings. News that the German economy contracted by a larger than expected -3.8% QoQ in the first quarter and that Russia's growth fell -9.5% highlight the depth of the hole that the global economy fell into. About the best that can be said is that we may have found the bottom, but that still leaves a steep climb out before we can expect anything resembling a real recovery. Full text »

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05/10/2009 - USD pummeled as risk rally extends gains

Fri, 08 May 2009 19:00:00 GMT

* USD pummeled as risk rally extends gains
* Staying cautious on further advance
* Inter-market correlations continue to dominate
* ECB shifts policy in light of economic severity
* Key data and events to watch next week

The USD succumbed this past week, falling across the board, as stocks and commodities continued to strengthen as incoming data continues to suggest the worst is over in the current downturn. Employment data in Australia and Canada surprised to the upside, when further job losses were expected, and those currencies continue to lead the way higher. US April jobs data were also not as bad as forecast, though the unemployment rate continues to rise. US bank stress tests revealed a less dire situation for the largest US banks, though many are skeptical of their significance in the event of a more protracted downturn, and financial shares led the way higher overall for stock markets. Commodity prices also rallied strongly throughout the week, both on USD weakness and less-bad data that suggests demand may recuperate sooner than expected. Full text »

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05/03/2009 - Potential break-out in FX building, but...

Fri, 01 May 2009 19:00:00 GMT

* Potential break-out in FX building, but...
* Important price levels to watch
* UK economic update and GBP outlook
* RBA and ECB the market moving meetings next week
* Key data and events to watch next week

After an initial set back on news of the swine flu outbreak, risk appetites bounced back sharply, sending the USD lower and the JPY-crosses higher this past week. The short-term price action in the JPY-crosses was especially persistent, suggesting the potential for further gains in the weeks ahead, as markets increasingly conclude that the worst has been seen in the global downturn. As we have noted repeatedly in recent weeks, however, the data points showing improvement have mainly been sentiment gauges (e.g. ZEW, IFO, PMI's, ISM manufacturing, Conf. Bd. consumer confidence), which have bounced back in most cases from record lows. In contrast, economic outlooks for the year as a whole have been repeatedly downgraded (German government, BOJ, RBNZ, Fed staff, and the IMF) suggesting a significant disconnect. While it is not surprising that sentiment should rebound from extreme lows, the issue comes down to sustainability. In that sense, the improvement in risk appetites remains exceptionally fragile. Full text »

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04/26/2009 - Risk appetites falter initially, but stage a comeback

Fri, 24 Apr 2009 19:00:00 GMT

* Risk appetites falter initially, but stage a comeback
* USD on its heels and gold may be set to advance
* Stress test preview proves anticlimactic and ambiguous
* What to expect from the Fed, RBNZ, and BoJ next week
* Key data and events to watch next week

Markets overall continue to waver on signs that the global downturn is stabilizing, and after an initial bout of weakness, riskier assets have staged a mild comeback. The G7 draft communique explicitly noted that the global economy was showing signs of stabilization. On the week, stocks and JPY-crosses have declined slightly, but are well above the lows seen at the beginning of this past week. The USD, as measured by the US dollar index, is down more substantially on the week, which would seem inconsistent with only minor losses in risky assets, but makes sense given the heavy weighting of Europe in the index. European data this week carried the torch of improving sentiment, with Eurozone confidence gauges (ZEW, IFO and PMI's) all improving more than expected and bolstering the view that the worst is over. Full text »

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04/19/2009 - Risk appetite looks poised to wane some more

Fri, 17 Apr 2009 19:00:00 GMT

* Risk appetite looks poised to wane some more

The rally in risk lost some thrust this week despite a plethora of improved economic reports and bank earnings. The more prescient US economic indicators showed some signs of bottoming out. The NY and Philly regional indices blew away consensus expectations and suggest things are at least not getting any worse in the manufacturing space. Meanwhile, the homebuilder index (NAHB) popped to its highest level since October while housing starts and building permits witnessed a sharp downside correction - a good sign in terms of speeding up the return to equilibrium on the home price front. Full text »

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04/12/2009 - Divergences continue in risk sentiment indicators

Fri, 10 Apr 2009 19:00:00 GMT

* Divergences continue in risk sentiment indicators
* Important price levels to watch
* EUR fails to follow risk trades as quantitative easing looms
* Key data and events to watch next week

The great debate continues: Have we hit bottom in stocks and risk sentiment, or is this just another bear market rally? Currencies continue to give off mixed signals, but largely FX and gold are not buying into the notion that the worst is over. Despite stocks gaining further ground, which recently has been correlated to USD weakness, the USD index posted a solid gain for the week. In technical terms, it posted a bullish engulfing line on weekly candles and rose above the daily Tenkan line, suggesting further gains may lie ahead. But the USD index is heavily weighted toward Europe (77.3%), and USD index strength may just be a reflection of increasing EUR negatives (see below). More broadly, this past week saw general erosion in the G3 currencies (US, Europe/UK, and Japan) against all others. That weakness in turn belies the ongoing nature of the contraction in the leading consumption economies, which quite simply keeps the global trajectory pointed lower. As for gold, price fell sharply over most of March and early April as stocks rose, which is what the risk aversion correlation would suggest. But gold stabilized and recovered in this past week, even as stocks, and ostensibly sentiment, gained further ground. Full text »

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04/05/2009 - Risk rally continues, but remains suspect

Fri, 03 Apr 2009 19:00:00 GMT

* Risk rally continues, but remains suspect
* Critical turning points may be at hand
* RBA, BOJ and BOE rate meetings on deck next week
* March nonfarm payroll report points to more pain ahead
* Key data and events to watch next week

After briefly sputtering at the start of this past week, risk sentiment has continued to improve as evidenced by gains in stocks and JPY-crosses (carry trades) and declines in the USD, gold and Treasuries. My outlook for a return to risk aversion failed to materialize, but I am still suspicious of the staying power of the current rally. However, one of the hallmarks of major market bottoms is that gains develop despite incoming negative data and still gloomy outlooks, with investors essentially looking beyond the immediate environment in anticipation of better days ahead. That certainly seems to be the case at the moment, but major risks lie ahead. Full text »

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03/29/2009 - USD bounces back--Are risk appetites set to worsen?

Fri, 27 Mar 2009 19:00:00 GMT

* USD bounces back--Are risk appetites set to worsen?
* G20 and SDR talk is just noise
* ECB meeting next week a likely catalyst for more EUR weakness
* Key data and events to watch next week

One week after the USD plunged against other major currencies, the greenback has come bouncing back. The reversal stems from many reasons, but the keys to watch are: 1) Fears over USD devaluation stemming from the Fed's buying of Treasuries were allayed by solid investor demand for $98 bio of new Treasury issues spanning the 2,5, and 7 year terms. Contrast that with a failed UK auction (demand was less than the amount offered) of only about GBP 1.7 bio in 40-year bonds. 2) Outlooks elsewhere worsened further: Eurozone industrial new orders plunged to a YoY decline of -34.1%. And that was January data. Do you think orders picked up in Feb. or March? Not bloody likely. The March Swiss KOF leading indicator fell to -1.79, a new low in the current downturn. UK retail sales slumped -1.9% MoM in Feb. after a slight improvement in Jan. In Japan, retail trade in Feb. dropped further to -5.8% YoY from -2.4% in January. 3) Anticipated ECB rate cut next week and potential moves to quantitative easing (more below). 4) Greater detail from the US Treasury on plans to entice private capital to take on toxic bank assets. This is still a work in progress and we'll need to see if the buyers and sellers are able to find satisfactory price levels to engage, but it dissipated a negative hanging over the USD. 5) Lack of follow-through--much of the week was spent testing the USD downside, with some notable action following ill-considered comments from Tsy. Sec. Geithner on the USD reserve role, but the lows established last week held firmly and USD sellers eventually threw in the towel. Full text »

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03/22/2009 - The Fed adopts QE and the USD gets hurt

Fri, 20 Mar 2009 19:00:00 GMT

* The Fed adopts QE and the USD gets hurt
* Why the USD may not fall much more

The Fed surprised markets by announcing another massive expansion of its balance sheet in process known as quantitative easing (QE), which is frequently referred to as 'printing money.' In addition to prior asset-purchase programs, the Fed announced plans to buy an additional $750 bio of GSE mortgage-backed assets, between $100-200 bio in other government agency back debt, and $300 bio in US Treasuries, for a total of up to $1.25 trillion. Certainly the amounts are staggering and indeed the moves will result in a significant expansion of the money supply. Full text »

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03/15/2009 - Sentiment improves and the USD softens

Fri, 13 Mar 2009 19:00:00 GMT

* Sentiment improves and the USD softens
* SNB steps in on the CHF
* Japanese financial year end flows and JPY
* Policy events that could impact markets
* Key data and events to watch next week

In last week's report, I suggested that market pessimism had become extreme and that any improvement in sentiment, as seen in stock market performance, would likely hurt the USD as its safe haven allure diminished. After a final plunge in shares to start the week, investors took heart from comments from leading US banks that they had returned to profitability in the first two months of the year. US shares subsequently led a global equity market rebound and the USD fell against most other major currencies. Financial shares led the way higher and this seems natural given the source of the news, but it's also important for the durability of the bounce. Regardless of accuracy, markets appear to believe that a resurrection in the banking sector is a prerequisite for a rejuvenation of the broader stock market and overall economic outlook. Full text »

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03/08/2009 - The hits keep coming and risk aversion reigns

Fri, 06 Mar 2009 19:00:00 GMT

* The hits keep coming and risk aversion reigns
* Frail US consumer to weigh heavily on global growth
* Key data and events to watch next week

If it weren't for bad news, there would be no news at all these days, it seems. Friday's NFP report suggests the US labor market continues to deteriorate with no end in sight. ECB staff slashed Eurozone 2009 growth forecasts by -2%, with an intensified contraction now expected in the second half of the year. Canadian Fin. Min. Flaherty said on Friday he expects that 2009 economic data will be "persistently poor." Bank of Japan Dep. Gov. Yamaguchi expects the Japanese economy to remain in a "severe condition" into the new fiscal year beginning in April and noted "The speed and the magnitude of the deterioration is something we haven't experienced for decades." And that observation comes from an official in the country of the Lost Decade. As such, it's little wonder that investor pessimism has reached such epic proportions. At the same time, a good argument can be made that pessimism and risk aversion have reached extreme levels and are due for a correction. Note, though, that nothing on the fundamental horizon is expected to improve any time soon. Indeed, further deterioration in incoming data should be expected. Full text »

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03/01/2009 - USD outlook still higher but near-term correction possible

Fri, 27 Feb 2009 19:00:00 GMT

* USD outlook still higher but near-term correction possible
* Gold uptrend likely to resume after profit taking plunge
* Key data and events to watch next week

The USD extended gains this week and the overall trend in what now looks to be the sole safe haven paper currency remains bullish as we muddle through the first half of 2009. That said, short-term corrections in what has become a very volatile trading environment are a dime a dozen and a move lower cannot be ruled out. Technically the USD index looks to be potentially setting up a double top around the 88 level, though we'd need to see below the 100 day simple moving average near 85 to even suggest this pattern is coming to fruition. Full text »

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02/22/2009 - Don't look now, but the worst for markets may be over

Fri, 20 Feb 2009 19:00:00 GMT

* Don't look now, but the worst for markets may be over
* More JPY weakness likely as data worsens
* The bullion bull-run continues, for now
* Key data and events to watch next week

This week saw all the key risk aversion indicators continue to gain ground, indicating eroding sentiment, but by the end of the week many of them had seen potentially significant reversals, suggesting an improved risk environment may lie ahead. The USD pressed higher for most of the week on ostensible safe haven buying, with the USD index nearly reaching the November 2008 high at 88.45, only to reverse course sharply on Friday. As a result, the weekly candlestick formed a shooting star, complete with a gap open higher, a strong reversal pattern after an advance, with confirmation coming from further declines next week. The high at 88.25 effectively leaves a potential double top at 88.25/45, providing another possible reversal pattern. In EUR/USD, the 1.2500/50 area proved resilient, and the breakdown below 1.2720/30 that started the week was negated by the weekly close back above 1.28, which also saw EUR/USD close above the Tenkan line at 1.2794, the initial signal of a directional reversal. Full text »

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02/15/2009 - US set to pass fiscal stimulus package

Fri, 13 Feb 2009 19:00:00 GMT

* US set to pass fiscal stimulus package
* Brutal range environment prevails
* G7 unlikely to save the world, but may see JPY weaken
* Key data and events to watch next week

At this writing, the US House of Representatives has passed the $787 billion economic stimulus package, and the Senate is set to vote later this evening, with passage expected there too. So it looks like the US will have the much ballyhooed and maligned stimulus package and the question is "now what?" The most likely answer, I think, is "not much." It will be months until the stimulus money finds its way into the economy and months until it has any effect on economic data, so we are left with sentiment as the primary driver. Given most economists' views that the package will at best cushion the US downturn, a relapse in sentiment is as likely as any rally. In the meantime, the global recession continues to weigh on the near term outlook for risk assets, generally lending the USD support. The offset to this will be concerns over the US ability to borrow the expected $2.0-2.5 trillion it needs this year to fund the TARP, the stimulus package, and normal operating deficits. Full text »

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02/08/2009 - Sentiment rebounds on a wing and a prayer

Fri, 06 Feb 2009 19:00:00 GMT

* Sentiment rebounds on a wing and a prayer
* Important price levels to watch
* Treasury refunding will gauge appetite for US paper
* Horrid employment report and a bleak 1H09 ahead
* Key data and events to watch next week

In last week's report, I suggested "we are either very near a top in the USD or set to see a new phase of risk aversion and a safe haven surge into the USD." This past week saw the former scenario play out, as investor optimism rebounded, and the USD was sold lower alongside the JPY, sending the risky FX assets (JPY-crosses) sharply higher by the end of the week. Investors are betting that the US will finally pass a fiscal stimulus package and, more importantly, the US Treasury will at noon on Monday unveil a reportedly comprehensive plan to stabilize the US banking system. As such, the nascent rally in optimism is based on hope rather than any material change in the outlook, which remains bleak at best. In terms of FX movements, major pairs have simply gone from testing range lows to testing range highs, so we do not yet have evidence of a concrete break out. However, many of the building blocks and tell tale signs of a reversal are appearing and I would caution against fading the breaks if they materialize. ('Fading' refers to trading against a directional move, such as selling into a rally or buying into a decline.) The risk next week is that the ranges are maintained and all the frothy optimism that emerged at the end of this week evaporates in the face of the long haul ahead. Full text »

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02/01/2009 - The pendulum of sentiment keeps swinging

Fri, 30 Jan 2009 19:00:00 GMT

* The pendulum of sentiment keeps swinging
* Concerns mounting on the fate of the EUR
* Outlook for RBA, BOE and ECB rate meetings next week
* Key data and events to watch next week

The main driver in FX remains overall investor sentiment, with stock market movements as the primary barometer of risk appetites. When stocks are up and sentiment is positive, the USD, the JPY and gold are typically sold, and when shares start falling, the USD, JPY and gold are all bought. The rally in shares that started this past week was echoed in EUR/USD strength and JPY-cross strength, but sentiment quickly turned on the surfeit of bad news, whether it was weak earnings, dismal data, or dire prognostications. The positive wave of sentiment was largely based on prospects for the US fiscal stimulus plan and the potential creation of a 'bad bank' to absorb toxic bank assets, but the optimism quickly faded as hopes for a quick fix to the US and global downturns proved unsustainable. However, hope springs eternal and new US Treasury Secretary Geithner is working on a comprehensive plan to stabilize the US financial sector, though concrete details have yet to emerge. News reports late on Friday suggested that the 'bad bank' plan has been scrapped altogether, leaving the outlook even more uncertain and downbeat than before. Full text »

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01/25/2009 - USD strength may be setting up for a reversal

Fri, 23 Jan 2009 19:00:00 GMT

* USD strength may be setting up for a reversal
* Intervention risks increase in GBP, JPY and CHF
* FOMC and RBNZ rate meetings next week
* Trade in Japan weakens further as intervention rumors swirl
* Key data and events to watch next week

The past week saw the USD gain further ground against other major currencies (except for the JPY), but the key I think is that the greenback had great difficulty maintaining those gains. The same was true for the JPY crosses, which experienced pronounced selling on most days, only to stage equally dramatic rebounds before each day's end. The two developments are closely related in that increased risk aversion typically leads to USD safe-haven buying alongside JPY-cross (carry trades) selling. The moves in FX closely resemble stock market developments, where heavy selling early in the week (risk aversion) proved unsustainable and key technical level were regained by week's end. In last week's report, I suggested that renewed risk aversion might quickly vanish and this past week's price movements suggest to me that such a reversal may develop next week. Full text »

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01/18/2009 - Risk aversion returns, but it may vanish just as quickly

Fri, 16 Jan 2009 19:00:00 GMT

* Risk aversion returns, but it may vanish just as quickly
* Important price levels to watch
* Bank of Canada poised to cut rates next week
* Potential credit rating downgrade in Spain a catalyst for lower EUR
* Key data and events to watch next week

Markets remain caught between despair and the hope that things can't get much worse. This past week saw waves in both directions, with risk aversion rearing its head early in the week on renewed banking sector losses and overall gloomy outlooks. By the end of the week, however, a number of the key issues were being addressed (among others, additional US government bank guarantees for a major US bank; UK government considering similar bank mortgage guarantees; second half of TARP made available; US House passed $825 bio fiscal stimulus package; and US officials are now considering a so-called 'bad bank' aggregator to absorb toxic debts from banks to repair balance sheets and restore lending), raising the prospect that risk aversion may dissipate as quickly as it re-surfaced. Then there is the unpredictable sentiment shift that may occur with the inauguration of President-elect Obama and the departure of Bush 43. Full text »

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01/11/2009 - Data continues to soften across the globe

Fri, 09 Jan 2009 19:00:00 GMT

* Data continues to soften across the globe
* EUR looks set to weaken further
* ECB looks poised to cut rates aggressively next week
* Key data and events to watch next week

In case anyone doubted that we're facing a global recession, data reports this week pointed to an accelerating deterioration in key economic indicators from all the major economies. In the US, the Dec. NFP report released Friday, while not as disastrous as worst-case scenarios, revealed the loss of 1.1 mio jobs and a 0.5% increase in the unemployment rate to 7.2% over the last two months. The precarious labor market in the US, alongside still-falling home prices, keeps US consumers under a cloud and will keep US consumer spending on a downward trajectory for the foreseeable future. The incoming Obama administration's efforts to establish a fiscal stimulus package, the source of much optimism at the start of the year, appear to face numerous obstacles. Beyond potential Congressional opposition, the size of the package being discussed is likely too small to make a significant difference. Congressional wrangling threatens to delay the package beyond mid-February, but even if a package is passed sooner rather than later, it will still take several months before any effects are felt. The best case scenario is that declines in job losses and personal consumption can begin to stabilize sometime in the 2Q, which feels like an eternity. Full text »

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01/04/2009 - Pacing the global downturn

Fri, 02 Jan 2009 19:00:00 GMT

* Pacing the global downturn
* The USD should fare better
* An aggressive BOE rate cut may support the pound
* Key data and events to watch next week

The calendar may have changed, but the global economic environment remains the same--weak and getting weaker. The major data reports in hand so far (US manufacturing ISM and Eurozone manufacturing PMI's) point to further contraction in the US and European manufacturing sectors, typically leading economic indicators. The wave of economic weakness that began in the US is still washing ashore in Europe and rapidly spreading to key Asian economies. Even China, still growing to be sure, saw its Dec. exports fall into negative territory (-2.2% YoY) for the first time this decade, in a sign that the manufacturer to the world is beginning to feel the developed world's pain. We can expect further deterioration in incoming data reports at least through the 1Q 2009, led by poor US and European data. Full text »

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12/21/2008 - Extraordinary volatility obscures the near-term outlook

Fri, 19 Dec 2008 19:00:00 GMT

* Extraordinary volatility obscures the near-term outlook
* USD demand ebbed, EUR demand increased
* ECB announces key changes to market operations
* Key data and events to watch next week

In perhaps a fitting end to one of the most volatile trading years I have ever seen, torrential USD selling suddenly gave way to an onslaught against the EUR. Year-end illiquidity certainly exacerbated the currency market's abrupt gyrations and it may even have been the root cause, but it has clouded the near-term outlook considerably. The USD selling took on a frenzied pace following the Fed's aggressive rate cut to a range of between 0.0% and 0.25% and the explicit adoption of quantitative easing by the US central bank. (Quantitative easing (QE), a term coined by Japan at the start of the decade, refers to a central bank policy that seeks to inundate an economy with liquidity (cash) to spur domestic demand and fend off deflation. The central bank does this by buying debt securities (balance sheet expansion) and driving yields lower to drive down consumer interest rates.) Many analysts refer to QE as 'printing money' and frequently leap to the conclusion that QE leads to a weaker domestic currency on the simplistic basis that more supply leads to a lower price. But that view neglects the relative value argument that drives currency relationships, meaning a currency is only weak relative to another currency's strength. Full text »

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12/14/2008 - USD reversal lower may be unfolding

Fri, 12 Dec 2008 19:00:00 GMT

* USD reversal lower may be unfolding
* Key price levels to watch
* Automaker bailout to dictate USD/JPY price action
* Fed expected to cut rates... but will it matter?
* Key data and events to watch next week

Last week I suggested that market sentiment was subtly improving, as stock markets shrugged off weak data and plodded on to modest gains. I viewed the emerging stabilization in shares as an indication that safe-haven demand for USD was diminishing and that the greenback was likely to weaken and JPY-crosses to benefit. This past week's price action delivered just such USD weakness and JPY-cross strength and I look for additional USD weakness in coming weeks. However, it's important to note that the weakness in the USD was primarily concentrated against the EUR, and less so against other major currencies, such as AUD, NZD, and GBP, which makes some of the USD weakness suspect. Full text »

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12/07/2008 - Preparing for better days?

Fri, 05 Dec 2008 19:00:00 GMT

* Preparing for better days?
* Improvement in the market will signal USD peak
* Key data and events to watch next week

A funny thing happened on the way to the recession. A steady stream of ever-weakening data in the US and abroad failed to see stock markets make new lows. That was so last week. Indeed, many are viewing the S&P low at 750 at the end of November as a pivotal low and are watching closely as a potential 'inverted head and shoulders' pattern plays out. (An 'inverted head and shoulders' pattern is a bottoming formation after a decline.) Friday's dismal NFP reading was the latest dose of bad tasting medicine the markets had to swallow, but swallow it they did. Clearly, there is little in the fundamental outlook to inspire confidence much less a rebound in shares, but the market dynamic may be working its own sort of magic at the moment. Now that it's official that the US has been in a recession for the past year, the feeling is that most of the bad news has already been priced in, which would be largely consistent with this week's market performance--bad, but not as bad as it could have been. Looking ahead, the stage may be getting set for a more sustainable recovery in stocks and investor sentiment as we head into the last weeks of the year. Full text »

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11/30/2008 - Markets are given a reprieve, for now

Fri, 28 Nov 2008 19:00:00 GMT

* Markets are given a reprieve, for now
* Central Bank rate decisions: RBA, RBNZ, BOE, and ECB

Financial markets were thrown a lifeline when the Fed stepped in to guarantee troubled assets of a major US bank and initiated yet another lending facility to stimulate business and consumer lending. Promises of additional fiscal stimulus from the incoming Obama administration added further fuel to the rally, and global stock markets rebounded in major fashion, erasing the devastating losses of the prior week. Risk appetites recovered in tandem and this saw the USD sold off and the JPY-crosses rally strongly. By the end of the week stocks had maintained their gains, but the JPY-crosses had surrendered nearly all of the gains for the week, leaving the outlook for risk appetites highly uncertain. It seems that without recurring government initiatives, markets are unable to sustain rallies, which is to be expected given the unfolding global recession. Adding to the confused sentiment, Friday's strong recovery in the USD was driven by month-end USD fixing demand from asset managers as well as increases in inter-bank lending rates, which saw USD LIBOR rise above the Fed's target rate for the first time in a month. While most likely due to month-end distortions, the USD recovery and the deterioration in credit market conditions suggests we still have a long way to go before sentiment is stabilized. Full text »

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11/23/2008 - Risk appetite dictating the pace in a very emotional market

Fri, 21 Nov 2008 19:00:00 GMT

* Risk appetite dictating the pace in a very emotional market
* Treasury auctions and auto bailout key for the buck's direction
* Key data and events to watch next week

Risk appetite continued to dictate the pace in very emotional markets this week. US stocks got decimated nearly -14% as a supposed deal to bring relief to the US automakers and speculation that a large US bank would be split up and sold never materialized. The S&P 500 took out the 2002 intraday low and made a fresh 11 year nadir just above the 741 mark as we write. The buck was once again the beneficiary of this flight to safety and the USD index jumped 2% on the week. Full text »

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11/16/2008 - Markets twisting in the wind as deleveraging continues

Fri, 14 Nov 2008 19:00:00 GMT

* Markets twisting in the wind as deleveraging continues
* Key levels to watch in stocks and major FX pairs
* Low expectations for the G20 meeting this weekend
* Key data and events to watch next week

Sustained relief in this environment does not seem likely and rallies will remain selling opportunities over the next several weeks at the minimum. This weekend's G-20 meeting in Washington is not expected to produce any concrete initiatives (see below) and the risk is that another spasm of despondency (i.e. selling) ensues in the aftermath. Fiscal stimulus packages have been announced in many individual countries, but their implementation is yet to occur, leaving any remedial impact likely months off. The US Congress is set to consider a second fiscal stimulus package as well as a bailout for the US auto industry in the next few weeks. But opposition may be fierce and a comprehensive stimulus package may be delayed until the new Congress takes office in January, leaving markets and investors to twist in the wind until then. Full text »

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11/09/2008 - More bad news on the global recession

Fri, 07 Nov 2008 19:00:00 GMT

* More bad news on the global recession
* FX consolidates, but a breakout may be looming
* Some credit measures improve, but concerns remain
* Key data and events to watch next week

The global growth outlook continues to deteriorate in an accelerating fashion, and it's now evident that growth in the major economies plunged sharply over the last two months. The IMF in its latest forecast now foresees recessions for the G7 economies into 2009, with no sign of any recovery until late next year, and possibly not until 2010. US data this week saw the ISM manufacturing and service sector PMI's drop to clearly recessionary levels. Friday's Oct. NFP report, including revisions, revealed that the US economy has lost more than 1.2 mio jobs so far this year, with nearly half of those losses coming in the last three months alone. Data and outlooks from the UK and Europe are equally dismal, prompting an aggressive rate cut of 1.5% from the BOE and a more tepid 0.5% from the ECB, with assurances of more to come. Bottom line: the 4Q looks to be a complete debacle for the major economies. Additional interest rate cuts from the Fed, BOE, ECB, and RBA are coming, but with credit constrained by a hobbled banking sector, lower rates are unlikely to stimulate consumer spending any time soon. Full text »

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11/02/2008 - Is it safe yet?

Fri, 31 Oct 2008 19:00:00 GMT

* Is it safe yet?
* US election and the impact on the USD
* RBA, BOE and ECB rate decisions next week
* Key data and events to watch next week

Good riddance October. A month that began with much hope as the US government pursued the housing/financial sector rescue package ended with unprecedented carnage in nearly every asset class, leaving few investors unscathed. Hedge fund and portfolio withdrawals forced asset sales, driving down shares worldwide and triggering margin calls, which prompted yet further selling. In currencies, this sent the JPY-crosses (carry trades) plunging and the USD soaring. Additional government steps late in the month (Fed extension of USD swap lines to Brazil, Mexico, Singapore and South Korea; interest rate cuts from the Fed, China, Norway, and Japan; and the start of the Fed's commercial paper program, to name just a few) triggered sharp rebounds in shares and carry trades, but much of the damage remained. The economic outlook deteriorated still further as US 3Q GDP printed negative (and the details of the report were even worse than the headline reading), US and European confidence gauges fell to new lows (for many, all-time lows), and the Chicago PMI plunged. Credit conditions continued to improve, but remain above pre-Lehman levels, as is overall market volatility. With financial market conditions still at stressed-out levels and economic outlooks eroding rapidly, it would be premature to suggest that further bouts of panic won't still materialize. However, the stabilization seen in this final week of October does favor a more prolonged period of consolidation as markets get their feet back under them. Full text »

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10/26/2008 - Global de-leveraging decimates carry trades

Fri, 24 Oct 2008 19:00:00 GMT

* Global de-leveraging decimates carry trades
* Technical guide posts for key currency pairs
* A few more lifelines for ailing credit markets
* Key data and events to watch next week

What a difference a week makes. My expectations for some sense of stabilization in financial markets were utterly obliterated this week as stock markets worldwide plunged in unprecedented fashion. The main driver was global de-leveraging, which boils down to selling assets of every stripe, with stock markets as the primary recipient of the pain. Markets have been de-leveraging in earnest since mid-summer, but the latest wave down in share prices has come against a backdrop of worsening economic outlooks in all major economies. This has seen the latest round of selling hit emerging markets especially hard, with Asian and European shares getting pummeled as well. This latest wave of selling reeks of capitulation and panic, along with forced liquidations by asset managers and hedge funds, but so have prior sell-offs in recent months. This leaves me and many other feeling as if there is no end in sight, though I remain mindful of upcoming government initiatives (e.g. TARP, commercial paper buying fund, and even talk of lowering the Fed's reserve requirements) that have the potential to bring some relief. What's different this time seems to be how the selling has cycled around to hit non-US markets to a greater extent than prior rounds of de-leveraging, which may indicate the de-leveraging process is closer to an end. There is also the timing of the current sell-off-October is a historically ugly month for stock markets, and this is aggravated by hedge fund redemptions due to be paid November leading to additional selling in October. But with ongoing deterioration in economic data and outlooks, as well as investor withdrawals (redemptions), there is clearly more potential for continuing liquidations. That leaves me in default mode, where the operating premise is that things will get worse until they get better. Full text »

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10/19/2008 - Credit strains begin to ease; risk appetites improve

Fri, 17 Oct 2008 19:00:00 GMT

* Credit strains begin to ease; risk appetites improve
* USD likely to weaken against all others but JPY
* Bank of Canada and RBNZ rate decisions
* Key data and events to watch next week

Over the last few weeks we have been calling for an eventual improvement in financial market conditions as a series of aggressive government-led steps are set to come into effect. If you were only looking at stock prices, however, it might be difficult to discern any sense of stabilization. But if you look at credit market conditions, the signs of a thaw are becoming apparent. The measures of credit market stress that we monitor are all showing signs of improvement, though all still remain at stressed-out levels. (Many of the following indicators are spreads between two interest rates. The larger the spread, the worse are credit conditions. The smaller, or narrower, the spread, the better are credit conditions.) The TED Spread, which measures the difference between borrowing costs for banks relative to governments, is down over 100 bps from its peak at 4.63% seen last Friday. The two year swap spread, which measures the difference between 2-year Treasuries and the floating swap rate, is down about 40 bps from its high of 164.75 bps seen on Oct 2. By these two measures alone, credit market strains have eased by about 25% over the last week. Three-month LIBOR rates, which measure the cost of lending between banks, a proxy for counterparty risk (the higher LIBOR is, the greater the fear of lending), has also fallen, but relatively less so, dropping from 4.82% to 4.42%. Again, all of these credit market stress gauges are still abnormally high, but are clearly showing improvement. Full text »

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10/12/2008 - The final capitulation?

Fri, 10 Oct 2008 19:00:00 GMT

* The final capitulation?
* Outlook for currencies during the turmoil
* The last best hope--direct capital infusions to banks
* Key data and events to watch next week

In last week's report, I held out the prospect that the US government rescue package might result in a change in sentiment in financial markets and signal the start of the healing process. I also noted "The major risk to this outlook is that I am premature and there is a final spasm of market pessimism, resulting in a capitulation collapse across asset classes." Unfortunately, my timing was off and the latter outlook proved to be the case, well beyond my worst nightmares. But in this process, there are many rays of hope. One of the contrarian indicators that suggest a market is in the process of bottoming is a final plunge, usually driven by panic selling emanating from emotionally ravaged investors. Such was certainly the case this week, culminating on Thursday and Friday with massive declines. But on Friday, the collapse was not sustained and US stock exchanges managed to finish near flat on the day. One of the other indicators of a market bottom is just such a day's price action, best symbolized as a 'star' on daily candlestick charts. The long tail at the bottom represents the final wave of selling which was ultimately reversed by new buying entering the market. While I run the risk of being premature again, I remain optimistic that this was indeed a key reversal day. Full text »

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10/05/2008 - The Rescue Package passes, finally; will hope emerge?

Fri, 03 Oct 2008 19:00:00 GMT

* The Rescue Package passes, finally; will hope emerge?
* Credit markets hold the key
* Major central bank rate decisions next week
* Key data and events to watch next week

After an ugly balk on Monday, the US Congress has passed the Troubled Asset Relief Program (TARP). The main thrust of the legislation is to allow the US Treasury to buy illiquid mortgage-backed securities (MBS) from banks and other financial institutions, removing the problematic assets from their balance sheets. The hope is that the cloud of suspicion between financial institutions will then be lifted, allowing banks to raise new capital and resume lending to the broader economy. The sooner the flow of credit can be restored, the hope-thread continues, the milder the drag on the US economy is likely to be. As you can see, a lot of what is happening is aimed at shoring up confidence, both in the financial system and in investors' and consumers' minds. As commentators across the spectrum have been noting, this is not a silver bullet and it seems unlikely that markets will immediately rebound. It will take time for the Treasury to implement the program, time for the banks to raise capital, and time for investors' fears to fade. But a corner has been turned and I look for a gradual easing of systemic pressures over the next several weeks. I hope. Full text »

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09/28/2008 - Waiting on the TARP package

Fri, 26 Sep 2008 19:00:00 GMT

* Waiting on the TARP package
* Near-term outlook for the Buck
* US outlook dims, but others fading faster
* Key data and events to watch next week

"Don't worry about the mule being blind, just keep loading the wagon" seems to capture the market reaction as we await the fate of the 'Troubled Asset Relief Program' (TARP). The analogy refers to the absence of a deal, which is seeing generally better risky-asset performance. Congressional leaders are still negotiating the details of the government's proposal to un-freeze credit markets as this is written, but I remain confident that an agreement along the lines put forth by Treasury and modified by House and Senate leaders will be reached. The market's response so far has been to embrace the likelihood of a package as a signal to put risk back on. This was most evident in stock market gains on Thursday and USD strength going into the end of the week. The impasse that materialized on Friday temporarily saw risk-assets falter, but as of late afternoon Friday stocks are mostly up, JPY-crosses are mostly higher, and the USD is nearer to its highs for the week. Why am I optimistic on TARP passage? Simply put, the alternative is 'you don't want to see what happens if it isn't passed.' No one I know is pleased to be in this situation, but the alternatives are truly worse. With failure not an option, some form of the TARP will be passed. Full text »

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09/21/2008 - Government actions cloud the USD outlook

Fri, 19 Sep 2008 19:00:00 GMT

* Government actions cloud the USD outlook
* Risk appetites return, for the moment
* What does the Fannie/Freddie takeover mean for the dollar?
* Key data and events to watch next week

Oww! My head hurts. A lot has happened in the course of the past week and like many in the market I'm having some difficulty getting my head around what has happened and what it means going forward. The major news is clearly the US government plan to form a Resolution Trust Corporation (RTC)-like entity to absorb toxic MBS (mortgage backed securities) debt from financial firms' balance sheets. The focus here is on returning the US financial sector to some form of normalcy so it can resume supplying badly needed credit to the US economy, which is a good thing. Many details of the plan are yet to be revealed, not the least of which is the expected cost, which leaves many questions still open, and that is a bad thing. (For instance, how much more will banks need to write down when they off-load their troubled MBS debt, and what will that do to their capital reserves and ability to lend?) The details are expected to be ironed out over the weekend and in coming negotiations between Fed/Tsy/Congress next week, with a likely plan in place by the end of the week. In the meantime, I offer my preliminary thoughts on what recent developments mean for the USD and other currencies below. Full text »

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09/14/2008 - The USD surge continues--The outlook from here

Fri, 12 Sep 2008 19:00:00 GMT

* The USD surge continues--The outlook from here
* Fresh signs of slowing global growth
* What does the Fannie/Freddie takeover mean for the dollar?
* Key data and events to watch next week

The greenback continued to climb this past week and the USD index broke above the symbolic 80.00 level briefly, but by the end of the week those gains could not be sustained. In EUR/USD the 1.4000 psychological level was broken and EUR/USD fell to key weekly trend line support at 1.3870/80, which was highlighted in last week's report. But that level held and provoked a bounce back onto the 1.41 handle, generating increasing signs of a consolidation. For the first time in the entire EUR/USD decline, daily candlesticks posted a reversal signal (a hammer on Thursday) that was later confirmed by Friday's price action. This pattern suggests that some consolidation may be on the horizon. Significant supports in other pairs have also held on a weekly closing basis: AUD/USD at 0.8000 and GBP/USD at 1.7500. Weekly candlesticks in EUR/USD, GBP/USD, and AUD/USD are all showing 'spinning tops', which is an indication of indecision in the current trend, adding to the prospect of consolidation. At the same time, the overall pattern of USD dips being bought aggressively was also reinforced, with attempts to rally in EUR/USD and GBP/USD on Tuesday being sharply rejected. Full text »

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09/07/2008 - The USD surge continues; no end in sight

Fri, 05 Sep 2008 19:00:00 GMT

* The USD surge continues; no end in sight
* New levels to watch in EUR, GBP, and AUD
* Expect some Kiwi volatility with RBNZ on deck
* Hurricanes and 9/11 anniversary may roil markets
* Key data and events to watch next week

So much for the period of consolidation I was expecting last week. The USD surge has continued and the persistence of USD price gains remains as forceful as the early phase of the USD rebound. Price action continues to point to massive position liquidations, as USD pullbacks remain exceptionally shallow and new highs occur with little seeming relationship to data releases or other time-specific events. In simpler terms, asset managers are still looking to unload long EUR, GBP, AUD positions and ultimately get short those currencies, preferably on bounces in those pairs. When better levels to sell at fail to materialize, these funds are forced to go to market and sell into weakness at successively lower levels. Full text »

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08/31/2008 - USD consolidating for now; key levels to watch

Fri, 29 Aug 2008 19:00:00 GMT

* USD consolidating for now; key levels to watch
* The USD will continue to strengthen
* RBA, BOC, ECB and BOE rate decisions next week
* Key data and events to watch next week

The USD largely consolidated its recent gains this week, but not before making marginal new highs against the most beleaguered currencies (EUR, GBP, and AUD). Data continued to come in showing further deterioration in both current conditions and future outlooks in the UK and Europe. In contrast, US data continued to come in mostly better than expected (existing homes sales, consumer confidence, durable goods, 2Q GDP, and Chicago PMI all beat expectations). This is a theme we have been following for several months now, and it finally seems to have taken hold among analysts in the broader market. In contrarian thinking, that would suggest the bulk of the USD's moves are done for the time being. But I'll argue later that this is most likely simply a period of consolidation that will be followed by further USD gains. In the meantime, traders need to be prepared for more consolidation and relatively choppy conditions, subject to key levels I'll outline next. Full text »

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08/24/2008 - Consolidation setting in, but continue to favor USD

Fri, 22 Aug 2008 19:00:00 GMT

* Consolidation setting in, but continue to favor USD
* Commodity rebound is a bounce to sell on
* Status check: The US vs. the Rest
* Key data and events to watch next week

The USD made fresh new highs early in this past week, but was unable to sustain the gains and a consolidation phase appears to be setting in. The economic fundamentals largely supported those moves, with European data largely coming in steadier than expected and US data presenting worrisome elevated jobless claims, weaker housing and a larger than expected drop in the index of leading indicators (mainly due to the drop in building permits). We know the US housing sector remains mired in weakness and that the new homes segment is the weakest of this weak sector, so there should be no surprises. The jury is still out on the reliability of weekly jobless data due to extensions to unemployment eligibility passed in early July. But we also already know that the US labor market was soft, just not as bad as in prior downturns on a population adjusted basis. Full text »

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08/17/2008 - The USD surge is for real

Fri, 15 Aug 2008 19:00:00 GMT

* The USD surge is for real
* The great global growth slowdown is just getting started
* Don't bet against the US consumer
* Key data and events to watch next week

Last week's USD break higher has been confirmed by further gains this past week, while pullbacks have been exceptionally minimal. The speed and size of the move caught many in the market off guard, and while many analysts have already started with the 'too far, too fast' routine, I would argue further direct USD gains are in store. Precisely because the USD rebound was so fast and large, many asset managers missed the move and have been anxiously waiting for some pullback on which to buy USD. That the pullbacks of the last two weeks have been so minimal and so short-lived (rarely more than 4 hours) is evidence that institutional investors and asset managers are being forced to go to market and buy USD on strength/sell EUR on weakness. Normally, that dynamic tends to create more instability-- new positions are opened at disadvantageous price levels and are ripe to get whipsawed. Full text »

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08/10/2008 - Is the USD rally for real?

Fri, 08 Aug 2008 19:00:00 GMT

* Is the USD rally for real?
* Fundamental and technical arguments for a move back into the range
* Strategy outlook
* Key data and events to watch next week

The very sudden and very explosive USD rally has many believing that this is finally it for the buck, the move higher we've all been waiting for. That said, the speed at which this happened still has us cautious about a short-term reversal. EURUSD fell out of bed in last 24 hours, plunging to a recent low of 1.5005 after touching a high near 1.5505 moments after Trichet's hawkish inflation comments hit the tapes. The selling that followed was fast and furious as the market took Trichet's subsequent remarks on the weakening Euro-zone economy as confirmation that the central bank will be hard-pressed to raise rates further -- despite the fact that their only mandate is to keep inflation in check. Indeed, the futures market is now pricing in odds of ECB rate CUTS into 1Q 2009. The sharp move leaves EURUSD in "no man's land", below the recent range of 1.5290/1.5930 but above the previous November-March range of 1.4310/1.4980. While the fundamentals of deteriorating European growth and a stabilizing US economy augur for further weakness in EURUSD, we would be cautious about further acceleration in USD gains until we break back below 1.4980/70. Full text »

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08/03/2008 - It's official: The US economy is 'less crappy' than the rest of the G7

Fri, 01 Aug 2008 19:00:00 GMT

* It's official: The US economy is 'less crappy' than the rest of the G7
* A breakthrough for solar/fuel cell technology
* Central bank decisions next week: Fed, RBA, ECB & BOE
* Key data and events to watch next week

To use a technical economic term, the US economic outlook is decidedly 'less crappy' than the rest of the other G7 economies. In last week's report, Jake Oubina provided readers with a concise recap of recent data that pointed to stabilization in the US contrasted with a rapid deterioration in economic data elsewhere, but especially in the UK and Western Europe. This past week saw that pattern continue for the US and the data from across the Atlantic actually deteriorated even more substantially. I won't go into all the data points here, but I will note US 2Q GDP came in just shy of 2% annualized (and is likely to be revised slightly higher based on positive revisions to other 2Q data) and that the July NFP job loss was less than expected. I'm not suggesting the US has turned the corner toward strength, but it's clearly stabilizing and fears of recession are, or should be, continuing to fade. Compare that to the dismal data stream coming out of Europe and the UK, which led the largest US investment house to change its UK forecast today to a recession in 2H 2008, and I continue to look for the USD to perform better against the other major currencies. Perhaps the easiest way to think about it is not as a 'buy the USD story', but as a 'sell EUR, GBP, CHF, AUD and NZD' story. Full text »

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07/27/2008 - USD strengthens across the board; looking for more to come

Fri, 25 Jul 2008 19:00:00 GMT

* USD strengthens across the board; looking for more to come
* EUR/USD & USD/JPY price levels to watch
* Outlook continues to stabilize in US while deteriorating elsewhere
* Key data and events to watch next week

The USD recovered broadly against other major currencies this week as the GSE panic subsided further and oil and other commodity prices continued their sharp retreat. US 2Q bank earnings reports also came in generally better than expected, though many firms still reported significant losses and write downs, but left the impression that financial sector hemorrhaging is nearing an end. Non-financial firms' 2Q earnings reports were also generally better than expected, reinforcing the notion that US firms are well-positioned to weather the current economic storm, with attendant positive implications for the US economic outlook. Full text »

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07/20/2008 - The panic lifts and the USD survives

Fri, 18 Jul 2008 19:00:00 GMT

* The panic lifts and the USD survives
* Oil weakens and a top is evident
* Euro strength pinching Eurozone growth
* Key data and events to watch next week

This time last week the world as we knew it seemed to be on the verge of collapse. The GSE's were under assault, the US financial system was looking into the abyss and the USD was being punished as a result. As I suggested last week, however, US officials stepped up to the plate and organized a backstop for the GSE's, raising the implicit Federal guarantee to its most explicit level yet. The SEC also imposed restrictions on short-selling of GSE shares and their rebound has been almost as spectacular as their sell-off. Overall financial sector stocks have also had a stunning rebound as balance sheet woes finally appear to be coming to an end. While losses were still registered for the 2Q, the key take-away is that there is not much left for many of these firms to keep writing down. The US Congress still needs to act on the GSE plans put forward by the Fed and Treasury, and while the devil may be in the details, I am confident that the Congress will pass the essential core of Treasury's plan sometime next week and I look for markets to breathe another sigh of relief. Full text »

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07/13/2008 - Market crisis or mass hysteria?

Fri, 11 Jul 2008 19:00:00 GMT

* Market crisis or mass hysteria?
* Intervention risks mounting
* The US outlook is actually stabilizing
* Key data and events to watch next week

As Bart Simpson might say: "Ay Carumba!" As shareholders of certain GSE's might say: "Mommy." This past week started out with the USD on the mend and oil and other commodity prices dropping sharply only to turnaround mid-week and see the USD plunge to near all time lows and oil prices surge to new record highs. The causes for the sudden shifts are as unrelated as they are sudden, and, I believe unjustified. But this is the state of the world we live in now: doom and gloom pervades, and panic is just a step away. The US dollar's woes stem largely from a flight out of US assets over fears that key GSE (government sponsored enterprises) mortgage lenders are on the verge of collapse. Oil's surge is attributed to heightened tensions between Iran and Israel, with a fair amount of rumor and subterfuge behind those tensions. In both cases, mass hysteria seems to have got the better of markets and this is cause to treat the price movements with suspicion. From a trading perspective, however, market hysteria frequently overwhelms facts in the short-run and traders are strongly urged not to stand in the way of a panicked mob. Instead, wait for signs in price movements that the moves are reversing. Full text »

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07/06/2008 - The post ECB/NFP dollar rally looks overdone

Fri, 04 Jul 2008 19:00:00 GMT

* The post ECB/NFP dollar rally looks overdone
* ECB hikes as expected, but was it a one and done?
* US employment data were much worse than expected
* Key data and events to watch next week

In one fell swoop the greenback managed to reverse what was shaping up to be a terrible week, on the back of an NFP number that was seen as in line with expectations and an ECB seemingly on hold following the 25 bps increase. EUR/USD opened the week near 1.5790 and looked poised to break through 1.5800 in earnest, a level it had not closed above since late April. Even the 1.6000 area seemed within reach as EUR/USD crossed above 1.5900 just ahead of the simultaneous ECB press statement/US NFP release. It was not to be, however, as the NFP report was deemed to be in line with consensus (we argue it was worse below) while Trichet was interpreted as telling the market that the ECB is on hold. EUR/USD shot down quickly following Trichet's comments and was sitting more than 200 pips lower at 1.5690 just hours later. Given other market developments we believe this move was likely overdone. Full text »

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06/29/2008 - Back to the brink-again

Fri, 27 Jun 2008 19:00:00 GMT

* Back to the brink-again
* The Fed disappoints, but signals only one direction
* Month/quarter-end promise heightened volatility; ECB and NFP to boot
* Key data and events to watch next week

The world as we know it would seem to be coming to an end. Oil prices have risen through the $140/bbl level, stock indexes globally are trading at or below their lows for the year (no small feat), and the USD is on the verge of collapsing. And yet, the feeling of panic that accompanied the last visit to the edge of the abyss does not seem as much in evidence. Instead, this time around the aura seems to be one of resignation and helplessness. Of the two episodes, the current one seems more ominous in the sense that solutions seem less available. Key central banks have already largely exhausted their ability to provide monetary stimulus and are now constrained by runaway inflationary pressures. The financial sector, having assured markets a few months ago that the worst was behind them (I cautioned readers on April 18 "Don't buy it"), are back under the gun and financial system stability is being threatened anew. Central bankers have cautioned that additional bailouts are less likely and this raises the prospect of more severe financial sector stresses than before. Consumers globally are being pummeled by rising food and energy prices against a backdrop of slowing economic growth and restricted credit. If there is any light at the end of this tunnel, it seems very far off and likely a mirage. Full text »

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06/22/2008 - Ranges hold and the chop continues

Fri, 20 Jun 2008 19:00:00 GMT

* Ranges hold and the chop continues
* Carry trade meltdown increasingly likely
* FOMC rate decision due next week
* Key data and events to watch next week

Currency traders are certainly having their patience tested as most major pairs continue to bounce around in relatively well-worn ranges. The outlook for a break of recent ranges is pretty weak at the moment, given the ongoing data battle between high inflation readings and slowing growth indicators. And those data jousts are taking place in virtually every G-10 economy as the rise in inflation pressures and the slowdown in economic growth are global phenomena. I think traders should continue to approach the market from a range-trading perspective, and only go with a break-out if there is significant 'new' news out. Full text »

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06/15/2008 - The pendulum swings back in the USD's favor

Fri, 13 Jun 2008 19:00:00 GMT

* The pendulum swings back in the USD's favor
* Timing of Fed/ECB rate moves is key to USD outlook
* G-8 focuses on inflation; supports USD recovery
* Mind the Range, please

Two weeks ago, the USD surged on comments from Fed Chair Bernanke, sending the pendulum to the extreme side of USD strength. By the end of that week, however, the pendulum had swung all the way back to extreme USD weakness after the ECB indicated it is increasingly likely to raise rates at its July 3 meeting and the US unemployment rate unexpectedly surged. This past week saw the pendulum swing once more to the extreme side of USD strength on continued hawkish rhetoric from the Fed and some better than expected US data. This type of price action, while extreme and ultimately frustrating for break-out traders, is the essence of a range, which has been the defining feature of Forex markets over the last two months. Range conditions developed primarily because key central banks effectively moved to the sidelines in terms of adjusting interest rates. The Fed shifted from easing to steady, as did the Bank of England, while the ECB was caught between slowing growth and high inflation. Central bank interest rate expectations are now in flux and promise to make trading conditions extremely challenging in the weeks ahead. The predicament comes from the market's rather extreme reaction to what may be only minimal interest rate moves. However, an end to the recent 1.53-1.58 EUR/USD range may finally be at hand. Full text »

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06/08/2008 - Fed attempts to bolster USD, ECB flummoxes

Fri, 06 Jun 2008 19:00:00 GMT

* Fed attempts to bolster USD, ECB flummoxes
* May NFP reveals the glass is half empty
* Bank of Canada rate decision on Tuesday
* Update from Downunder (AUD & NZD)
* Key data and events to watch next week

The new month got off to a rollicking start (yes, I'm being sarcastic) with Fed Chair Bernanke on Tuesday addressing USD weakness in prepared remarks to the International Monetary Conference. Bernanke explicitly noted that the Fed, "in collaboration with our colleagues at the Treasury," was carefully monitoring currency markets, the important points being that Treasury was included and that the weak USD was on the Fed's radar screen. Bernanke noted that USD weakness had an impact on inflation and inflation expectations and voiced a preference for a "strong and stable dollar." His remarks caught the market off guard, but his message was ultimately deemed to be potentially significant by many market participants and a USD buying spree ensued. By early Thursday morning, the USD was on the verge of breaking higher, with the USD index breaking up over trendline resistance dating back to last August, and higher out of the Ichimoku cloud. But the moves were not to last. Full text »

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06/01/2008 - A Fed rate hike? Not so fast

Fri, 30 May 2008 19:00:00 GMT

* A Fed rate hike? Not so fast
* Short-term outlook for the USD
* Rate decisions due from RBA, RBNZ, BOE, ECB
* Key data and events to watch next week
* Commodity currency updates

The greenback picked itself up off the mat, dusted itself off and rallied back from the brink, aided by a surge in US interest rates. Over the course of this past week, US 10 year yields rose 30 points at their highest, before finishing out up 20 bps just above the key 4.00% level. 2 year yields rose over 30 bps, but finished out similarly up about 20 bps and just above the 2.60% level. The proximate cause for the jump in rates was a widely expected upward revision to 1Q US GDP (from +0.6% to 0.9%) and a stronger than expected April durable goods report. The better data came on the heels of several weeks of heightened anti-inflation rhetoric from Fed officials, which was compounded with additional inflation warnings this week from the Fed's Stern and Fisher, which coalesced into increased prospects for a Fed rate hike. A rate hike? Full text »

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05/25/2008 - Oil continues to climb, weighing on USD

Fri, 23 May 2008 19:00:00 GMT

* Oil continues to climb, weighing on USD
* Stocks finally respond to gloomy reality
* GBP and NZD recover on false hopes
* Key data and events to watch next week

Oil prices remain in the spotlight as they continue their seemingly inexorable rise to who knows how high. Indications of a price stall last week were quickly overwhelmed by a surprisingly large crude oil inventory drawdown, according to weekly US statistics, even as indicators of gasoline and oil demand have started to decline. The spillover effects into the broader consumer-led economy are only beginning to be felt, but announcements by airlines of additional fare increases and other charges to offset higher fuel costs suggest sky-high oil prices are beginning to affect corporate profitability and will continue to reverberate through major economies. At this point, oil prices need to see back below $130 trendline support to indicate a potential top, and losses below 127.90 to signal the start of a pullback. The USD continues to be affected by oil price gains, but not to the same extent as earlier this year. Still, on the margins, higher oil adds to pressure on the USD, while a stronger USD tends to cap oil price gains. Full text »

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05/18/2008 - Range conditions prevail

Fri, 16 May 2008 19:00:00 GMT

* Range conditions prevail
* Bank of England signals inflation concern
* USD hobbled by high oil, but...
* Key data and events to watch next week

The USD has remained largely confined to ranges over the past several weeks. In EUR/USD, that range has been roughly 1.53-56; in USD/JPY, 102.50-105.50; in GBP/USD, 1.94-97; and in USD/CAD 0.9950-1.0250. To a large extent, these range-bound trading conditions reflect the current inertia of monetary policy at key central banks, with most interest rate policy setters now seen to be on hold. Given the offsetting effects of slowing growth in major economies and high inflation rates, the stalemate looks set to continue in the weeks ahead. Other markets, such as US stocks and Treasuries, are similarly range-bound owing to ongoing uncertainty and the lack of a clear directional theme to trade on. Even oil, which has caught a great deal of attention in recent weeks, looks to have reached a plateau, closing last week just below $126/bbl, and looks set to finish out this week only slightly higher at $126.60/bbl. Full text »

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05/11/2008 - Oil keeps moving higher, threatening growth, inflation

Fri, 09 May 2008 19:00:00 GMT

* Oil keeps moving higher, threatening growth, inflation
* Eurozone finance ministers meet next week
* Risk aversion comes back with a bang
* Key data and events to watch next week

Oil prices gained nearly 8% this week after a US investment house issued a report suggesting a 'super-spike' might be unfolding that could eventually see prices rise into the $150-200/bbl range. Rebel attacks in Nigeria, which temporarily disrupted crude exports, conveniently served as a nice background accompaniment to the steady grind higher in oil. Interestingly, the surge in oil defied a larger than expected weekly US inventory increase (5.6 mio bbls vs. forecast of 1.6 mio bbls), suggesting that market speculation rather than any demand constraint is actually behind the move. This makes the recent advance generally suspect and there is a lot of talk that the rally is overdone. But there are no imminent signs of a reversal, though momentum studies are overbought and currently showing a bearish divergence, suggesting potential for a reversal lower. While oil prices continue to move higher, global growth is going to be undermined and consumer sentiment will continue to deteriorate. Full text »

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05/04/2008 - The EUR is falling and the USD is weak

Fri, 02 May 2008 19:00:00 GMT

* The EUR is falling and the USD is weak
* The Fed pauses. So what?
* Credit concerns rise again
* RBA, ECB and BOE rate decisions
* Key data and events to watch next week

The financial media is abuzz with the Great Dollar Recovery story, but the real news traders need to focus on is the fall in the EUR. The USD is relatively stable at weak levels against most other major currencies-AUD/USD is only 150 pips below recent highs; USD/CAD remains mired in a 1.00-1.03 range; GBP/USD is stuck in a 1.96-2.00 range; and USD/JPY is slightly above the 103-105 range that has dominated for the last several weeks. The real mover over the last two weeks has been the EUR, and its southern cousin Swissy, but it gives the appearance that the USD is strengthening as the USD index has moved higher, since it's nearly 80% composed of European currencies. In last week's report, I highlighted that the EUR/USD was threatening to break lower and suggested several selling levels, which ultimately proved successful, as well as key support levels that were likely to trigger fresh losses. This past week saw those support levels broken and EUR/USD did extend its decline. The downside continues to attract as Eurozone data continues to print weaker (March German retail sales fell -0.1%; April unemployment rate rose from 7.8% to 7.9%; prelim.-April CPI declined MoM; mixed to weaker EC confidence readings). But most importantly, EU officials continue to speak out on the need for the Euro to weaken further. Full text »

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04/27/2008 - The USD rebounds, or was it the EUR finally stalling?

Fri, 25 Apr 2008 19:00:00 GMT

* The USD rebounds, or was it the EUR finally stalling?
* So what has really changed?
* Key data and events next week: FOMC, ISM & NFP

Many in the media and the market are pointing to the USD's gains this week as a turnaround for the beleaguered greenback. But I think a better way to view this past week's developments is in the context of sudden shifts in ECB rate expectations. Recall that over the last several weeks markets had been pricing out the prospect of anticipated ECB easing, both in light of repeated ECB warnings and resilient Eurozone data, which led to a steady rise in the EUR. then, early this past week, some ECB officials went so far as to suggest that the ECB might even need to raise rates to fully combat inflation, and that led to a surge higher in EUR, which saw EUR/USD crest 1.6000 very briefly. I can almost imagine the phone line lighting up between the ECB in Frankfurt and the Banque De France (BdF) in Paris with an enraged Trichet calling Noyer to take back his comments that a rate hike might happen. The reaction was swift-Noyer the very same day held an interview with the WSJ in which he retracted his comments, saying they had been "over-interpreted" by the market. The very next day, ECB Pres. Trichet came out and unequivocally declared that the current ECB rate was sufficient to ensure price stability, pointedly noting that was 'the view of the governing council.' Full text »

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04/20/2008 - Banks lose billions more, but 'the worst is past'; don't buy it

Fri, 18 Apr 2008 19:00:00 GMT

* Banks lose billions more, but 'the worst is past'; don't buy it
* The Big Disconnect: Fundamentals deteriorate, but risk is back on
* Market tests G7 resolve on USD weakness/EUR strength
* Key data and events to watch: Bank of Canada rate decision

Despite all indications that the US economy is slowing even further, US stocks and risk appetites in general have rebounded to their best levels for the year. Additional multi-billion dollar write downs and losses at major financial institutions are apparently no match for investors who buy the going wisdom that the 'worst is behind us.' The same people who said the sub-prime meltdown was contained 6-9 months ago are now touting the end of the financial crisis even as they announce major 1Q losses and additional job cuts. At the same time, credit rating agencies are still downgrading individual RMBS (residential mortgage-backed securities) issues, which will necessitate ongoing write downs of assets held on financial firms' balance sheets and continue to erode capital. No doubt, the government-led bailout of a major US investment bank and the opening of the Fed's discount window to non-bank financial firms instilled confidence in Wall Street that the government would step in again if the situation deteriorated further. But what is happening behind the scenes? Full text »

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04/13/2008 - After the G7, where for the EUR and USD?

Fri, 11 Apr 2008 19:00:00 GMT

* After the G7, where for the EUR and USD?
* A Different path for Asian currencies (JPY)
* Risk aversion returns, but not yet extreme

The G7 meeting appears increasingly likely to retain prior language on currencies:

"We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely, and cooperate as appropriate." Full text »

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04/06/2008 - Rebound in risk appetites looks set to falter

Fri, 04 Apr 2008 19:00:00 GMT

* Rebound in risk appetites looks set to falter
* EU Finance Ministers meeting this weekend; G7 next Friday
* BOE and ECB interest rate decisions
* Key data and events to watch next week

Friday's NFP report provided further evidence that the US economy remains on weak footing, as if any more were needed. But a strange thing happened on the way to the recession. Market sentiment appears to have embraced the view that the US downturn will be relatively manageable, if not downright mild. I'm not about to embrace that view, but I can understand where it's coming from. In the Week Ahead of March 21, I suggested that risk appetites (and USD/JPY and JPY-crosses) were set to rebound after aggressive Fed actions significantly reduced the potential for a US financial system failure. Indeed, since then risk appetites have come back, with JPY crosses up roughly 8 yen since March 21. Stock markets have recovered and commodities are stabilizing after sharp corrections. Full text »

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03/30/2008 - The Commodity Trend Is Your Friend

Fri, 28 Mar 2008 19:00:00 GMT

* The Commodity Trend Is Your Friend
* Is Anybody Home?
* Singing The Blues or Show Tunes?
* What's On Tap For Next Week?

Last week we saw massive reversals in the two hot commodity markets, gold and oil, as the leverage hedge fund community unloaded massive long positions to book profits as global risk aversion increased. Spot gold put in a $1032/oz high before shedding over $125/oz into the end of the week. NYMEX crude put in a similar 'slide' from $111.80/bbl down to $98.65/bbl. Now because the commodity markets are a natural hedge against the falling value of the USD, rapidly falling commodity prices sent the dollar shorts running for cover sending the USD higher against the G-7. At the start of this week, many traders were expecting this theme to carry into this week. But it's amazing how quickly the old adage 'the trend is your friend' is forgotten by the markets. Starting Sunday night we were in mostly a holding pattern until the underlying themes began to reassert themselves. Full text »

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03/23/2008 - The Buck bounces, but outlook remains uncertain

Fri, 21 Mar 2008 19:00:00 GMT

* The Buck bounces, but outlook remains uncertain
* Is the credit crunch over?
* Japanese gloom deepens, JPY is vulnerable
* Key data and events to watch next week

It was an eventful week to put it mildly: the fifth largest US investment house effectively vanished overnight; the Fed cut rates another 3/4%; US stocks fell to new lows but then recovered sharply; commodities fell back to earth in the largest weekly decline since 1956; and even the lowly USD managed a solid bounce. For the USD, the recovery looks to be mostly based on profit-taking on short dollar positions after the FOMC cut rates by 75 bps, in a classic 'sell the rumor, buy the fact' reaction. The Fed statement also suggested that additional rate cuts are unlikely to be as aggressive, leading to an overall reduction, at least for now, in expectations of how low US rates will ultimately fall. The USD was also supported by the chicken-and-egg relationship with commodities-as the USD strengthened, commodities came under profit-taking pressure as hedges for a weaker USD were taken off. Finally, the USD also gained support as the US slowdown increasingly looks set to drag down other major economies in the months ahead, a re-coupling I have been expecting for a while now. Full text »

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03/16/2008 - USD weakness becoming extreme, no end in sight

Fri, 14 Mar 2008 19:00:00 GMT

* USD weakness becoming extreme, no end in sight
* Intervention prospects are low, but increasing
* Fed rate decision on Tuesday; market desperate for relief
* Key events to watch for next week

The USD's plunge accelerated further this week, with EUR/USD vaulting over 1.55 to nearly 1.57 and USD/JPY dropping under 100 for the first time since 1995. Gold prices traded through the $1000/oz. level and the Swiss franc hit parity with the USD for the first time in history. USD sentiment remains overwhelmingly bearish and there is a growing sense the dollar risks falling into a death spiral without official action (market intervention to buy USD) to stem its slide. A number of analysts are now on 'intervention watch.' While I agree that the USD's decline has become extreme and the risks of intervention have risen, I have yet to see any indication from G7 officials that they are gearing up for intervention. Full text »

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03/09/2008 - Friday's price action may signal a short-term bottom for the USD

Fri, 07 Mar 2008 19:00:00 GMT

* Friday's price action may signal a short-term bottom for the USD
* Oil prices and US slowdown will spill over into slower global growth
* Fed increases lending to banks, but credit markets still jammed
* Key data and events to watch for next week

The USD continued to decline for most of the week, buffeted by weakness in the ADP national employment report and a downbeat Beige Book, with a hawkish ECB thrown on top for good measure. Friday's NFP report vindicated the weakness seen in the ADP report, for a change, and offers further evidence that the US economy is contracting at the moment. But the price reaction of the USD after the jobs report was significant and may signal a short-term bottom for the greenback. It's next to impossible to construct a fundamental argument over why the USD should recover, which leaves market technicals and positioning as the only potential source of a recovery. After the weak February NFP report (-63K jobs lost; unemployment rate fell from 4.9% to 4.8% on frustrated job seekers dropping out of the labor pool), the USD's initial reaction was a quick drop, but the weakness did not last long. The USD had been heavily sold earlier in the week in anticipation of just such a weak NFP report, and once it materialized, profit-taking buying of USD emerged. Full text »

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03/02/2008 - Dollar hammered by weak US data; breaks down out of range

Fri, 29 Feb 2008 19:00:00 GMT

* Dollar hammered by weak US data; breaks down out of range
* How high can the EUR go?
* Multiple central bank rate decisions next week
* Key data and events for next week

After trading in a broad consolidation range for just over three months, the greenback plunged to new all time lows against the EUR, breaking above the key psychological/ technical 1.5000 level. Follow-through buying has been abrupt and this is the result of the relative suddenness of the break-a lot of speculative buyers were caught off guard-and the amount of option interest at/above 1.50 generating EUR/USD buying demand. The immediate catalyst on Tuesday was a string of worse-than-forecast US data reports (higher PPI, lower home price, and sharply weaker consumer confidence), but the move really got going after Fed Vice Chair Kohn suggested that the US housing slump had more room to go and that financial market stabilization would be more prolonged. In short, Kohn suggested that the much hoped-for recovery in the second half of 2008 was likely to be postponed. That prospect of light at the end of the tunnel had been helping to support the USD despite overwhelming expectations that the US economy was softening and US rates were headed lower. Once that light went out, the buck went with it. Full text »

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02/24/2008 - USD weakens, but still within a range

Fri, 22 Feb 2008 19:00:00 GMT

* USD weakens, but still within a range
* Commodities outpace all other markets
* JPY repatriation has begun
* More US housing and other key data next week

The dollar gave up further ground against other major currencies as fresh signs of economic slowing materialized, but the overall ranges continue to hold. US data mostly came in on the weak side, while data elsewhere generally surprised to the upside. US Jan. core CPI was a touch higher at 0.3% MoM and 2.5%YoY, highlighting the ongoing threats from inflation. Jan. housing starts were slightly improved, but building permits, the leader in the cycle, fell further to 1048K from 1080K, suggesting there is no end to the downturn in new home building and the larger housing market. Jan. leading indicators declined -0.1%, while Philadelphia-area manufacturing sentiment fell even further to -24.0 from -20.9; forecasts had been for an improvement to -10.0. Minutes from the Jan. 29-30 FOMC meeting revealed a Fed highly concerned about the extent of the US downturn and clearly focused on stabilizing the US economy through lower rates. Markets remain convinced the Fed will cut rates a further 50 bps at its next meeting on March 18, with the weaker Philadelphia Fed Index inspiring some to expect 75 bps of easing. Full text »

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02/17/2008 - G-10 FX goes range-bound

Fri, 15 Feb 2008 19:00:00 GMT

* G-10 FX goes range-bound
* JPY-longs get squeezed out
* Bond insurers' credit ratings are the big near-term risk
* Key data and events for next week

USD strength that was evident late last week fizzled in the face of fresh signs of economic weakness and ongoing uncertainty over the near-term outlook. January advance retail sales printed better than market expectations, but after excluding gasoline and auto buying, they were flat, suggesting US consumers are indeed pulling back. Fed Chair Bernanke also kept the focus on the negative by citing the downside risks to the US growth outlook, while assuring legislators in testimony Thursday that the Fed would cut interest rates further if necessary. EUR weakness that was similarly apparent this time last week gave way to an unexpected improvement in ZEW surveys of Eurozone investor sentiment and jawboning from ECB Pres. Trichet. Trichet seemed intent on convincing market players that rate cuts are not on the table and that the ECB was still focused on restraining inflation. The net effect was for the USD and EUR to revert back to the middle of recent well-worn ranges. Full text »

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02/10/2008 - ECB shifts bias to neutral, EUR to adjust

Fri, 08 Feb 2008 19:00:00 GMT

* ECB shifts bias to neutral, EUR to adjust
* Global outlooks dims as US data softens further
* G7 meeting this weekend unlikely to note FX
* Key economic data and events for next week

For several months now I have been cautioning that ECB Pres. Trichet was blowing smoke when he threatened to keep raising interest rates to fight inflation, even as Eurozone growth was slowing. Trichet finally gave up the game on Thursday and effectively signaled that the ECB policy bias was now neutral. Market analysts, however, were quick to begin forecasting interest rate cuts as soon as April, with between 50-100 bps of easing seen in total for 2008. The Euro weakened across the board and seems likely to continue to soften in the weeks ahead. But I think the bulk of EUR weakness will be seen versus non-USD currencies, especially those with higher interest rates and better growth outlooks, primarily AUD and NZD, and to a lesser extent GBP. Full text »

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02/03/2008 - US NFP disappoints and the USD rebounds

Fri, 01 Feb 2008 19:00:00 GMT

* US NFP disappoints and the USD rebounds
* Possible bailout for bond insurers
* Key data reports and event for next week
* Stimulus package uncertain at worst, weak at best

Come again? The seemingly incongruent reaction is best explained, I think, through the lens of risk aversion. The unexpected loss of jobs reinforced fears that the US economy was tipping further towards recession, and this alarmed risk-seeking investors, who had been emboldened in recent days by stock market gains and a stabilization in the outlook following an additional 125 bps of Fed easing in January. Risk aversion had dropped off significantly over the week up to the NFP release, leading gold and stocks to reach their best levels in a while. For a moment, it seemed as though the market's worst fears were not going to be realized, and carry trades (long JPY-crosses) and stock prices were near their highs. Then came the NFP which jolted traders nerves and led to a widespread liquidation of risky assets. Gold, oil, and JPY-crosses all plunged in the aftermath, and as we have seen repeatedly in recent weeks and months, when risky assets are unloaded, the USD benefits. So rather than a USD-specific causation, a sharp deterioration in the risk environment was the ultimate take-away from the weaker NFP report. Full text »

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01/27/2008 - Roller coaster ride set to continue

Fri, 25 Jan 2008 19:00:00 GMT

* Roller coaster ride set to continue
* All eyes on the Fed next week
* US outlook remains weak, will drag on global growth expectations
* Stimulus package uncertain at worst, weak at best

You would certainly be forgiven if you're feeling a bit like Linda Blair in 'The Exorcist' after this week's market moves. I think my head has spun around at least twice in as many days and I reckon there are a few more spins ahead at the minimum. Markets are very fluid and there are a lot of important events coming up next week, but let me first try to put some of the events of this past week in context before delving into what lies ahead. Full text »

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01/20/2008 - Bloodbath on Wall Street

Fri, 18 Jan 2008 19:00:00 GMT

* Bloodbath on Wall Street
* USD set to benefit as EUR shows cracks
* Commodities in the process of peaking
* RBNZ, BOJ and BOC rate decisions due

Stocks fell into the abyss this week as fears of a US recession mounted, even as US policymakers sought to assure markets they were intent on delivering both monetary and fiscal stimulus. To give you some historical context on the extent of declines, the S&P 500 is off to its worst annual start-ever. But equity market losses were hardly confined to the US, as all major global stock markets are now down between 8-12% YTD. In the midst of the rout in equity markets, the USD managed to hold up extremely well and is even poised to potentially break out to the upside in coming weeks, which is extraordinarily counter-intuitive to say the least. I think traders need to consider that we are currently dealing with a market that is responding much more to psychology than to fundamentals, and that always makes for difficult trading conditions. Full text »

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01/13/2008 - Bernanke cements expectations for a 50 bp rate cut Jan. 30

Fri, 11 Jan 2008 19:00:00 GMT

* Bernanke cements expectations for a 50 bp rate cut Jan. 30
* Rate cuts unlikely to stem fears of a US recession
* Slower China is hitting global growth expectations
* Inflation, housing data are keys next week
* Bernanke to testify before Congress on Jan. 17

The USD is finishing the week mixed against other major currencies, with gains against the JPY, GBP and CAD, but lower against EUR, CHF, AUD and NZD. US stock market declines continue to overshadow all other market developments, providing one reason why the USD remains relatively rangebound. Important developments in the past week were Fed Chairman Bernanke's downbeat economic assessment and vows to take timely and decisive action to support the economy. His comments on Thursday effectively put a lock on a 50 bp rate cut to 3.75% on Jan. 30. However, stock market losses on Friday convinced traders that there was room for even steeper rate cuts, as Fed Fund futures began pricing in nearly 40% likelihood of a 75 bp. rate cut. Against this backdrop, the USD held up remarkably well, failing to extend losses against the EUR beyond the EUR/USD highs seen after the Dec. NFP report at 1.4825. Full text »

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01/06/2008 - Sharply weaker US data points to a 1/2% rate cut on Jan. 30

Fri, 04 Jan 2008 19:00:00 GMT

* Sharply weaker US data points to a 1/2% rate cut on Jan. 30
* Recession concerns mount, increasing risk aversion
* Multiple Fed speakers to illuminate growth/inflation debate
* ECB expected to hold rates steady but stay hawkish; BOE will cut UK rates

The first week of 2008 trading got off to an ugly start for currencies, and most other markets for that matter, with JPY-crosses trading sharply lower on heightened risk aversion in the face of data suggesting the US may slip into recession. The Dec. ISM manufacturing index dropped below the 50 expansion/contraction line, coming in at 47.7 vs. the expected 50.5 and a prior 50.8 reading. According to that series, then, the US manufacturing sector has begun to contract. Fed minutes from the Dec. 11 meeting also expressed a far more downbeat outlook for the US along with a more dovish indication that the Fed would cut rates further if the economy were seen to be faltering. Any doubt about that was eliminated when the Dec. NFP report showed a lower number of jobs added (+18K vs. exp. +70K) and a larger than expected jump in the unemployment rate to 5.0% from 4.7% (exp.4.8%). If there's one piece of data that gets the Fed's attention, it a sharp rise in unemployment. Friday's data tells me that the Fed is now going to need to cut rates by 1/2%, and the suddenness of the deterioration in the outlook for the US suggests it may even come before the scheduled Jan. 30 FOMC meeting. Full text »

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12/30/2007 - USD crumbles in holiday-thinned market

Fri, 28 Dec 2007 19:00:00 GMT

* USD crumbles in holiday-thinned market
* GBP remains the outcast of Europe
* Risk aversion increases after Bhutto assassination
* Next week: Existing home sales, FOMC minutes and NFP are key?

The Greenback was crushed against most major currencies, with the EUR the primary beneficiary, as softer US data and heightened risk aversion led to heavy position liquidation. The USD's collapse was exacerbated by reduced liquidity conditions in the holiday-shortened week, which was evident in the persistence of the directional price moves. It's always difficult to gauge the durability of price developments that take place during such holiday periods-and next week will be another-but I think it's safe to say that the USD correction higher has come to an abrupt end. Whether the USD will continue falling, however, is another question entirely. Full text »

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12/23/2007 - USD advance continues

Fri, 21 Dec 2007 19:00:00 GMT

* USD advance continues
* GBP falls into the abyss
* Risk appetite returns after more bad news from sub-prime
* What's wrong with this picture?

The USD continued to firm against other major currencies this week, even as more sub-prime related losses were announced by major US investment banks. The USD's gains are as much the result of other currencies being marked down on lower growth and interest rate outlooks as they are short-covering of excessive USD short positioning. Riskier assets, as indicated by JPY-crosses and equities, managed to stage a rebound at the end of the week, largely on the back of news that Merrill Lynch will receive a $5 bio investment from Singapore's sovereign wealth fund, Temasek Holdings. The news comes just one day after analysts at another investment house suggested Merrill would need to write down an additional $8 bio on sub-prime tainted securities. Full text »

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12/16/2007 - The USD has broken higher; contain your enthusiasm

Fri, 14 Dec 2007 19:00:00 GMT

* The USD has broken higher; contain your enthusiasm
* Eurozone growth outlook downgraded
* UK housing market continuing to tank
* Challenging trading conditions ahead into year-end

The USD staged a strong rally late in the week, largely on the back of higher PPI and CPI readings and a stronger than expected Nov. retail sales report. At the same time, the outlooks for other major economies continued to deteriorate, with Germany's IFO economic research institute lowering its 2008 German GDP forecast from 2.2% to 1.8% (2009 only 1.5%), Japan's Tankan survey pointing to weaker corporate sentiment ahead, and the UK's RICS housing price balance (price gains minus price declines) plunging to its lowest level since June 2005, while house price expectations fell to 1998 levels. Along the way, the USD broke several major technical levels, most notably 1.4520 in EUR/USD, suggesting this move is for real, but at the same time the overall outlook for the USD remains highly uncertain. Full text »

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12/09/2007 - USD tries higher, but can't sustain gains just yet

Fri, 07 Dec 2007 19:00:00 GMT

* USD tries higher, but can't sustain gains just yet
* Risk aversion returns as outlook stabilizes, for now
* Fed rate cut (Tuesday) of 1/4% now expected
* Trichet is blowing smoke on ECB tightening

The USD is closing the week largely unchanged against most major currencies, but the dollar did manage to sustain the break-out from its downchannel in the US dollar index from last week. That breakout, led by gains in USD/JPY last week, was augmented by EUR/USD dropping out of its primary up-channel dating back to mid-August. Follow-through on the break lower, however, was cut short by exceptionally hawkish rhetoric from ECB Pres. Trichet, who went so far as to indicate that some ECB central council members favored a rate hike at this week's meeting. The biggest loser against the USD was GBP, which plunged on weaker service sector and housing data ahead of the BOE 1/4% rate cut, which was correctly forecast in last week's report. Even the Canadian dollar managed to recover a lot of lost ground following the ostensibly surprising Bank of Canada 1/4% rate cut, which was also correctly suggested in last week's report. Full text »

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12/02/2007 - The USD mounts a comeback

Fri, 30 Nov 2007 19:00:00 GMT

* The USD mounts a comeback
* Fed rate cut looks certain after weak Beige Book, dovish comments
* Multiple interest rate decisions next week: ECB, BOE, RBA, RBNZ, and BOC
* Risk aversion wanes even as money market conditions worsen

The USD managed to stage a rebound just one week after dropping to all-time lows in the US dollar index last Friday. It's still too soon to indicate that the downside is over for the USD, but Friday's price action generated a break of the primary daily trendline lower, which had been operative since the middle of August. EUR/USD is closing on key daily channel support at 1.4620/30, and a daily closing break below would serve as confirmation that the uptrend has ended. Full text »

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11/25/2007 - Has the Euro peaked?

Fri, 23 Nov 2007 19:00:00 GMT

* Has the Euro peaked?
* US housing, confidence data to keep the focus on the negative
* Eurozone sentiment indicators will be key
* JPY-crosses (carry trade) setting up potential for a further drop

Thanksgiving week saw the USD take another dive, giving up further ground to the JPY as overall market volatility continued to make life difficult for carry trade positioning. In last week's update, I suggested that a daily/weekly close below the 108.70 level in USD/JPY would likely signify another 'ratcheting down' of the USD/JPY rate, with additional potential to the 105/106 area. We got the daily/weekly close below that level and that keeps the focus on the downside while it holds as resistance. Only a recovery past the 109.70/80 area would signal that the downmove is stalling and possibly reversing. The relatively sharp bounce seen on Friday generated a 'hammer' on the daily candlesticks, frequently an indication of an upside recovery after a decline, so Monday's price action will be critical. Full text »

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11/18/2007 - Commodity reversal is underway

Fri, 16 Nov 2007 19:00:00 GMT

* Commodity reversal is underway
* Risk aversion to keep carry trades under pressure
* Holiday-thinned trading conditions likely to heighten volatility
* Heavy data schedule all around next week

Carry trades (JPY-crosses) were once again the big movers, with most registering sharp losses as increased risk aversion sends speculative traders running for cover. The heightened risk aversion stems from continuing concerns over the health of the financial sector, owing to still large levels of toxic MBS assets corroding bank balance sheets and fears of further large write-downs in coming quarters. To give you an indication of the level of risk aversion, we are now back at levels last seen at the height of the June/July credit market meltdown. Adding to risk aversion is the approaching end-of-year, which typically sees speculative portfolio flows reduced as asset managers lock in gains and cut losing positions. Full text »

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11/11/2007 - Credit concerns and write-downs pummel stocks and risky assets

Fri, 09 Nov 2007 19:00:00 GMT

* Credit concerns and write-downs pummel stocks and risky assets
* Signs of a USD recovery are building
* Eurozone finance ministers meet Monday/Tuesday
* Heavy data schedule all around next week

The USD sank to new lows in its current downtrend against most major currencies, but by the end of the week, it was on the rebound against all but the EUR and JPY. Notably, however, it was not a US dollar-centric rebound, but rather a messy unwinding of risky asset trades, fueled by further write-downs (and rumors of still more losses and write-downs) of MBS (mortgage-backed securities) debt held by banks. The exodus from risky trades saw stocks plummet, JPY-crosses plunge, gold rejected from just below $850/oz, and commodities retreat from new highs. Full text »

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11/04/2007 - USD slumps further, Gold breaks $800/oz and oil hits $95/bbl

Fri, 02 Nov 2007 19:00:00 GMT

* USD slumps further, Gold breaks $800/oz and oil hits $95/bbl
* Fed signal on future rate cuts ignored as market looks ahead
* ECB & BOE expected to hold rates steady; RBA to hike 1/4%
* Fed Chair Bernanke updates Congress on Thursday

The USD slumped to new lows against all major currencies (apart from the JPY) as the Fed delivered on expectations of 1/4% rate cut at mid-week. The rate cut came with a statement that was roundly considered more hawkish than most had been expecting, but still the US dollar could find no support. Prior to the Fed's rate decision, 3Q advance GDP came in well above consensus forecasts at 3.9%, but the dollar stayed soft. The same effect was seen on Friday when Oct. NFP data showed an increase of 166K new jobs, nearly double consensus estimates, and the dollar declined to fresh lows. (See more on the NFP report below.) Bottom line--the USD continues to suffer from an overwhelmingly gloomy outlook on the direction of the US economy and interest rates, and there appears to be no light at the end of the tunnel. Full text »

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10/28/2007 - More downside for the USD ahead on expected Fed rate cuts

Fri, 26 Oct 2007 19:00:00 GMT

* More downside for the USD ahead on expected Fed rate cuts
* BOJ to stay on hold, again
* Oil prices, credit concerns pose an obstacle to stock market recovery
* Heavy data calendar all around
* Fed rate decision on Wednesday; Oct. NFP on Friday

The US dollar lost further ground this week as the G7 failed to make any reference to USD weakness/EUR strength and incoming housing data highlighted only bleakness. Tellingly, the only time the USD experienced any strength was on Monday when a larger than expected write-off by Merrill Lynch triggered a stock market sell-off, which sent JPY-crosses (carry trades) plunging. The collapse in the JPY-crosses spilled into the USD pairs, triggering stop loss selling of the non-JPY dollar pairs (EUR/USD, GBP/USD, and AUD/USD, buying of USD/CAD). In other words, only an abrupt market dislocation sparked USD-buying, which only serves to highlight the lack of support for the USD from any fundamental source. Full text »

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10/21/2007 - Credit concerns, weak earnings reports pummel USD, carry trades

Fri, 19 Oct 2007 19:00:00 GMT

* Credit concerns, weak earnings reports pummel USD, carry trades
* Interest rate expectations reverse sharply to favor an Oct. 31 FOMC cut
* G7 unlikely to voice explicit concern on currencies
* More weak US housing data coming up, keeping pressure on USD

Just a week ago, financial markets looked to be further on the mend and it seemed as though the worst of the summer's credit market crisis was past. Stocks were still on their highs, the USD was steadying on the back of reduced expectations of Fed rate cuts, and carry trades were making fresh highs after the July/Aug wipeout-all signs of markets normalizing and risk-taking behavior returning. But that was a week ago. Full text »

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10/14/2007 - Fed Chair Bernanke to update on economic outlook on Monday evening

Fri, 12 Oct 2007 19:00:00 GMT

* Fed Chair Bernanke to update on economic outlook on Monday evening
* G7 unlikely to take action; speculative positioning to rule in advance of meeting
* US data continues to weigh against another Fed rate cut
* ECB speakers ratchet up the hawkish rhetoric
* US housing data (bad) begins in second half of next week

The USD finished the week a bit lower in US dollar index terms, but the real play in the currencies was a renewed push higher in the JPY-crosses, the 'carry trade,' as was suggested in last week's outlook. Commodities also pushed higher, but look set to finish below their highs for the week. In gold, I would note two attempts to surmount $750/oz spot, which have failed for the time being. I will continue to watch that level as near-term trigger to larger gains or for signs of a rejection/reversal. However, I am not expecting next week to be a major breakout week, due to the impending G7 meeting. Full text »

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10/07/2007 - Markets are reducing expectations of an Oct. Fed rate cut

Fri, 05 Oct 2007 19:00:00 GMT

* Markets are reducing expectations of an Oct. Fed rate cut
* USD gloom remains post-NFP; carry trades/risky plays prevail
* Eurozone Finance Ministers to decry EUR strength to little avail
* BOJ will stay on hold for another meeting
* US Sept. advance retail sales are the next big clue

The USD finally found some support this week and managed to eke out small gains against EUR, GBP and JPY, but it remained weak against the commodity currencies AUD, CAD and NZD. JPY-crosses, the 'carry trade', along with other risky assets such as commodities and stocks, also posted solid gains for the week. In general terms, these developments suggest risk-aversion continues to wane and that should keep the upside open for further gains in JPY-crosses and commodity currencies versus the USD. The price action following the US NFP report was also revealing in that the USD was unable to sustain any of its gains from the data and looks set to finish the day weaker against EUR and GBP in particular. The daily candlestick pattern (a Hammer) from Friday suggests that the downward correction in the EUR/USD has already run its course, opening up the prospect for renewed attempts higher. Full text »

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09/30/2007 - USD weakness is now excessive

Fri, 28 Sep 2007 19:00:00 GMT

* USD weakness is now excessive
* Commodity run-up raises inflation risks
* US consumer, job market stable despite housing slump
* RBA, ECB and BOE to hold rate-setting meetings
* BOJ Tankan on Monday; US NFP on Friday

The USD was hammered again this week, and you can pick your reasons why: a sharp drop in US consumer confidence; further declines in housing data; increased fears of a US recession leading to lower US rates; skyrocketing commodity prices; the sun rose in the East yet again. You name it and it was a reason to sell the USD. Never mind that US stocks finished their best month since 1998, or that Aug. US consumer spending gained more than expected, or that weekly ABC consumer sentiment improved from -20 a month ago to -11 in the latest week, or that jobless claims data have yet to confirm the labor market weakness evident in the Aug. NFP report. Ignoring positive data and embracing negative data are the hallmarks of a downtrend and that certainly seems to be the current situation for the greenback. Full text »

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09/23/2007 - USD bearishness hits fever pitch

Fri, 21 Sep 2007 19:00:00 GMT

* USD bearishness hits fever pitch
* Risk assets/Carry trades are back in vogue
* Credit markets are on the mend, but not out of the woods
* Continuing to watch stocks as key gauge to risk seeking/aversion

The Fed surprised markets (and me) by delivering a larger than expected cut in benchmark interest rates, dropping the Fed Funds rate by 50 bps instead of the expected 25 bps. The result was as if a green light suddenly flashed on, signaling investors to resume risk-taking: equity markets surged, precious metals and commodities soared, and carry trades (long JPY-crosses, e.g. long EUR/JPY, AUD/JPY, and NZD/JPY) were put back on in a rush. Of course, the USD took a drubbing against all but the JPY, dropping sharply (1.5-2%) against European and commodity currencies by the end of the week. As of Friday afternoon, it's safe to say USD bearishness has hit a fever pitch, with front-page New York Times coverage and nearly every other media outlet running lead stories highlighting the dollar's weakness. Even the Loonie (CAD) made headlines, rising to parity against the USD for the first time since 1976. Full text »

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09/16/2007 - Fed set to cut rates only 25 bps; issue relatively stern statement

Fri, 14 Sep 2007 19:00:00 GMT

* Fed set to cut rates only 25 bps; issue relatively stern statement
* Fallout is likely equity and risky trade negative
* GBP under pressure from Northern Rock, overextended housing market
* Eurozone sentiment set to take a hit with lower ZEW

The US dollar finished last week modestly lower on the close, but up from its intra-week low at 79.30 in the USD index. The market remains heavily focused on USD bearish themes, but I think the real story remains the ongoing credit crunch and the uncertainty it poses for financial markets. Late last week we got another dose of bad news in the form of Northern Rock, the fourth largest UK mortgage lender, seeking emergency funding from the Bank of England (BOE). Northern Rock may be the tip of the iceberg in the UK, with home price indexes starting to show declines for the first time since 2001. In past weeks I have repeatedly cautioned about the risk of negative news surprises in general and on the risk facing the UK housing market in particular. These events appear to be in play at the moment and are very likely to keep the GBP under pressure, both against the EUR and the USD. Full text »

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09/09/2007 - Risk aversion remains the key focus, not the USD

Fri, 07 Sep 2007 19:00:00 GMT

* Risk aversion remains the key focus, not the USD
* Concentrate on JPY-cross selling (carry trade unwinding)
* Despite weak NFP, a Fed rate cut is still not assured
* Fed speakers on Monday will tell us what to expect
* US retail sales on Friday are the next key to the Fed outlook

The US dollar took a pounding after Friday's NFP report indicated a loss of -4K jobs in the month of August. Revisions to June and July were also negative, compounding the appearance that the US economy is tipping over, weighted down by ongoing real estate declines, higher consumer lending rates and tighter lending conditions. Street analysts are back flipping over themselves to forecast how aggressively the Fed will cut rates at its Sept. 18 meeting, with futures markets pricing in a 75% chance of a 1/2% rate cut as of Friday. However, I would suggest the situation is not as clear cut as the market consensus seems to expect. Full text »

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09/02/2007 - Credit conditions remain extremely tight

Fri, 31 Aug 2007 19:00:00 GMT

* Credit conditions remain extremely tight
* Risk aversion remains high
* Equity market recovery looks suspect
* Waiting for the next wave of position unwinding
* ECB, BOE, and RBA all expected to stay on hold

Major currencies spent another week see-sawing in relatively wide ranges as markets continue to assess the fallout from the sub-prime mortgage meltdown and its aftershocks. The USD (in US dollar index terms) looks set to finish out the week mostly unchanged, while stock markets survived a mid-week sell-off and look set to post modest gains on the week. However, judging by the S&P 500 index, stocks appear unable to surpass last week's highs at 1480 and this could be a bearish sign for stocks to start the new month. (Please note, this report was prepared around noon EDT Friday, without the benefit of weekly closing price levels.) A similar weekly price pattern is evident in the JPY-crosses, with 159.60/70 in EUR/JPY serving as the key weekly high. In short, what I'm seeing on the charts is that stock markets and carry trades (JPY-crosses) have stabilized further, but are unable to extend the correction higher. In market terms, buyers continued to emerge on dips, but they've either run out of steam at the weekly highs, or sellers are in abundance there, or a combination of both. In general, that keeps the downside in focus. I would also note that equity market volumes were extremely light in the past week, making the attempts to rally even more suspect. Full text »

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08/26/2007 - Is it safe yet? Relief does not spell end of concerns

Fri, 24 Aug 2007 19:00:00 GMT

* Is it safe yet? Relief does not spell end of concerns
* Looming interest rate decisions from BOE, ECB and Fed
* Heavy data calendars all around
* Trichet speaks on Monday morning; Bernanke Friday

What a difference a week makes. Last Friday the Fed came to the rescue and cut the discount rate in an effort to soothe rattled credit markets. The move appears to have worked, at least for the moment. In the ensuing calm this week, equity markets recovered and currency markets reverted to old habits-selling the USD and buying JPY-crosses (the carry trade). This week was notable for the absence of any significant data reports, meaning the market was left to trade primarily on sentiment and technicals. As the flow of negative credit news abated, again for the time being, sentiment was able to recover, bargain hunting followed, and as prices stabilized, momentum traders added to the recovery. Full text »

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08/19/2007 - Fed discount rate cut unlikely to end volatility

Fri, 17 Aug 2007 19:00:00 GMT

* Fed discount rate cut unlikely to end volatility
* More bad news is out there and ready to surface
* No rate hike expected from the BOJ
* ZEW for Germany and Eurozone may be very weak

What a week, to say the least. Equity markets plunged across the globe as investors panicked in the face of reduced credit availability, which accelerated de-leveraging and the unwinding of higher-risk positions. (De-leveraging refers to scaling down the size of position to a lower percentage of assets under management. In short, it means positions are sold sizes across all asset classes.) In the currency market, JPY-crosses (EUR/JPY, AUD/JPY, GBP/JPY, NZD/JPY) fell out of bed as carry trades continued to be unwound. Full text »

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08/12/2007 - Market volatility set to persist

Fri, 10 Aug 2007 19:00:00 GMT

* Market volatility set to persist
* JPY-crosses building for a decisive break lower
* US Equity markets have shifted to a downtrend
* What bad news is next?

Financial market turmoil continues unabated with the major development this week being the evaporation of lending in the inter-bank market, necessitating liquidity injections from the world's leading central banks. The proximate catalyst for that was the announcement on Thursday by BNP that it was freezing redemptions because it could not accurately value the assets held in three asset-backed securities (ABS) funds. Liquidity injections were needed again on Friday as banks demanded interest rates well in excess of central bank benchmark overnight interest rates for a second day in a row. For example, Fed funds opened on Friday at 6%, 0.75% higher than the Fed funds target rate. The Fed added liquidity, in three separate operations, to bring the rate back to the target level of 5.25%, while also opening the discount window, the Fed's last-resort lending facility. I don't know yet whether any banks had to go to the discount window (probably not given the Fed's repeated repo operations), but if any have it'll lead to another ratcheting up of credit concerns. Full text »

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08/05/2007 - Credit concerns and risk aversion continue to grow

Fri, 03 Aug 2007 19:00:00 GMT

* Credit concerns and risk aversion continue to grow
* Stock finish out on the lows, bounces unsustainable
* Carry trades finish out generally higher, but still heavy
* FOMC meeting on Tuesday, RBA on Tuesday evening EDT

The dollar is finishing the week lower against other major currencies, after a nervous and choppy week of trading. Throughout the week, the USD (in US Dollar index terms) was mostly steady amid the turmoil, and the weakness all came on Friday in the aftermath of weaker than expected July NFP jobs gains and ISM non-manufacturing readings. But the dollar was mostly a sideshow to the on-going uncertainty and disarray in the credit markets, which kept equity markets nervous and off balance. The DJIA looks set to close on new lows for this move down, while the broader S&P looks set to go out on four month lows. Full text »

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07/29/2007 - Carry trades (JPY-crosses) get crushed; more downside likely

Fri, 27 Jul 2007 19:00:00 GMT

* Carry trades (JPY-crosses) get crushed; more downside likely
* USD rebounds against Europe and commodity currencies
* Japanese elections on Sunday
* ECB and BOE rate decisions on Thursday
* US data slate is heavy; NFP on Friday

The USD dollar recovered sharply this past week, but the major development looks to be the meltdown in carry trades, most clearly evident in a collapse in the JPY-crosses. In last week's update, I cautioned again that the increase in risk aversion emanating from the debt/credit markets was likely to spread to equity markets, and that this might prove to be the trigger to a carry-trade sell-off. My worst case expectation that M&A/LBO associated debt issues would not find receptive buyers looks to have transpired, with debt issues for KKR's acquisition of Alliance Boots being shelved until conditions improve. (The next touchstone of debt market receptivity will come next week when a smaller tranche of KKR/Boots debt is set to go on sale, having been delayed from this week and re-priced with higher interest rates to attract reluctant investors.) That news came out on Wednesday and unnerved equity markets, but the major sell-off came on Thursday, and sent investors the world over running for the exits. Full text »

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07/22/2007 - Sub-prime mortgage concerns raise risk aversion

Fri, 20 Jul 2007 19:00:00 GMT

* Sub-prime mortgage concerns raise risk aversion
* JPY carry trade unwinding is major risk ahead
* Expect limited further upside in EUR/USD and GBP/USD
* US advance 2Q GDP report on Friday

The US dollar is closing slightly weaker against European currencies and down more significantly against the JPY, which translates into a lower weekly close for the JPY-cross carry trades. The USD continues to be seen as vulnerable against the backdrop of the losses in the mortgage-backed securities market. Despite those concerns, US stock markets DJIA and S&P) reached new all time highs, but were unable to sustain the gains on the last trading day of the week. The equity sell-off weighed on USD/JPY and JPY-crosses, and provided the only major excitement for the week. Full text »

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07/15/2007 - USD falls to major lows as US stocks hit all-time highs

Fri, 13 Jul 2007 19:00:00 GMT

* USD falls to major lows as US stocks hit all-time highs
* Sub-prime fears not a good reason to sell USD
* Fed Chair Bernanke give semi-annual outlook to Congress
* Looking for a US dollar reversal to form

The USD is finishing the week sharply lower across the board, with the most pronounced weakness coming against European currencies. The move lower was ostensibly triggered by concerns over losses in the mortgage-backed securities market, but those fears seem to have dissipated relatively quickly, as US equity markets broke out to new record highs in the second half of the week. But the dollar continued to fall as technical levels were breached and systematic momentum sellers reacted to additional weakness. The USD's decline has now reached significant technical support levels in the US dollar index and I'm looking for the downmove to transition into a consolidation at the minimum, with decent potential for a corrective rebound in the USD. Full text »

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07/08/2007 - USD closing weaker, JPY-crosses on the highs

Fri, 06 Jul 2007 19:00:00 GMT

* USD closing weaker, JPY-crosses on the highs
* Eurozone finance ministers meeting, may criticize JPY weakness
* Fed's Bernanke speaking on inflation on Tuesday
* BOJ to hold rates steady; Bank of Canada to hike on Tuesday

The USD is closing lower on the week against all non-JPY currencies, in line with last week's observation of a breakdown in the USD index. The USD closed slightly firmer against the JPY, which translates into yet another new high for the JPY-crosses and the carry trade in general. The dollar selling got off to a quick start on Monday and minor new lows were made subsequently. Interestingly enough, positive US economic data at the end of the week sparked only a minimal rebound in the USD. (ISM non-manufacturing rose to 60.7 from 59.7, a 14 month high, and June NFP beat market forecasts, though somewhat below ADP-inspired expectations of 150+, but strong revisions to the prior two months data more than made up). The better US data sent benchmark 10 year Treasury note yields up nearly 20 bps from the week's low, which led to a slight widening in the US interest rate advantage against the EUR, and yet the dollar remained heavy. Persistent USD weakness in the face of the better than expected data and higher rates suggests there is a larger wave of USD selling going through the market and this may be just the beginning of more sustained USD move lower. Full text »

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07/01/2007 - Fireworks are likely in carry trades and USD weakness

Fri, 29 Jun 2007 19:00:00 GMT

* Fireworks are likely in carry trades and USD weakness
* More uncertainty over mortgage-backed market expected
* BOJ Tankan on Monday in Tokyo
* BOE expected to raise rates, RBA hold steady
* US NFP on Friday

The US dollar is closing lower across the board after an extremely choppy week of trading. The week opened up with a sharp sell-off in USD/JPY and the JPY-crosses, collectively representing the carry trade, as concerns mounted over the extent of losses in the mortgage-backed securities market, fallout from the sub-prime mortgage meltdown. I had cautioned in last week's report that there was a disconnect between the resilience of the carry trade (Strong JPY-crosses) and the mortgage market problems, and that something had to give. The sell-off early in the week validated my concern, but the carry trade proved resilient and came storming back by the end of the week, with the JPY-crosses returning to re-test the highs made last week. So I'm left in much the same position as last week and continue to anticipate a larger shake-out in the JPY crosses. Full text »

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06/24/2007 - Mortgage-back market in US unnerves investors, raises risk fears

Fri, 22 Jun 2007 19:00:00 GMT

* Mortgage-back market in US unnerves investors, raises risk fears
* JPY crosses make new highs, but look to be setting up for a reversal
* FOMC meeting on Thursday; housing data and durable goods are key
* RBNZ looks to have intervened in Kiwi during late NY Friday afternoon

The US dollar is finishing the week lower against European currencies and slightly higher against the JPY, which means the JPY-crosses continued their relentless gains higher. New highs were reached in all the major JPY carry trade pairs: NZD/JPY, AUD/JPY, GBP/JPY, EUR/JPY, CHF/JPY and USD/JPY (CAD/JPY only managed to test prior highs). Despite the new highs in the JPY-crosses, I'm getting the sense that a shake-out lower is increasingly likely and I'll explain later in this update. Full text »

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06/17/2007 - USD looks to have stalled against Europe

Mon, 18 Jun 2007 15:00:00 GMT

* USD looks to have stalled against Europe
* JPY-crosses on fire as carry trades roar back
* Stock market gains are needed to keep JPY crosses up
* Light data week all around; US data focus is on housing

The dollar is finishing the week mostly unchanged against European currencies, but sharply stronger against the JPY, as carry-trades surged yet again and the BOJ signaled interest rates are not moving higher in the near future. The currency market was fixated on the bond markets for much of the week, after the sharp rally in global bond yields saw rates move higher globally, with US 10 year rates up over 35 bps over the last ten trading days at their peak. However, the bond yield rally had run it course by mid-week, and subsequent benign PPI and CPI reports saw yields retrace nearly 20 bps from the peak. The lower inflation readings dashed nascent speculation that the Fed's next move would be to raise rates, which in turn supported equities as they rallied strongly back to recent highs. Stock market strength in turn fueled additional JPY-selling across the board, as carry trades recovered. The strong positive correlation between JPY weakness and equity markets remains intact and Forex markets are likely to continue to be driven by stock and bonds next week as little data of consequence is out to drive currencies. Full text »

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06/10/2007 - RBNZ intervenes to stem Kiwi gains

Mon, 11 Jun 2007 15:00:00 GMT

* RBNZ intervenes to stem Kiwi gains
* US yields rally sharply, but look to have peaked
* Shake-out in carry trades looks to be short-term
* Heavy US data schedule in second half of week

The USD had one of it better weeks last week, rising against European currencies and the JPY, while remaining mostly sideways at low levels against the minor dollar pairs. Stronger US data (higher ISM non-manufacturing and narrower trade deficit) and hawkish commentary from Fed Chair Bernanke and other Fed officials saw US 10 year Treasury yields spike to 5.25% from 4.95% at the start of the week, though the weekly close looks to constitute a rejection from the key 5.25% level. Along with the US data and Fed comments, a not-completely unexpected NZ rate hike ignited global fears of higher interest rates which led to a shake-out of speculative positioning across global markets. As a part of this, the US stock market swooned in mid-week, but recovered about half of its losses by the end of the week, reinforcing the idea that the wave of risk reduction might have already run its course. Full text »

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06/03/2007 - Eurozone finance ministers meet next week

Mon, 04 Jun 2007 15:00:00 GMT

* Eurozone finance ministers meet next week
* G8 meeting next week unlikely to mention currencies
* Central bank rate decisions from RBA, RBNZ, ECB and BOE
* US economic data show rebound alongside receding inflation

The currency market remains hemmed in, with the USD continuing to range against European currencies and probe higher against the JPY. The minor dollar pairs (AUD, CAD, NZD) saw the USD weaken, with gains in the CAD continuing relentlessly after the BOC signaled it might need to raise rates in July. My much hoped-for breakout from recent ranges failed to materialize yet again, but the more it goes on the larger the break out is likely to be. We had a lot of data out this week from the US and rather than providing the spark to light a new directional trend, it mainly served to reinforce the existing consolidation. US Treasury yields made new highs for the year, with the 10 year note yield set to close around 4.95%, up nearly 6 bps on Friday alone. Importantly, though, the interest rate differential between the USD and most other major currencies held steady, meaning interest rates are moving higher across the board. Gold reversed course on Friday, rallying over $10/oz and ended the downside correction that dominated most of May. Full text »

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05/27/2007 - Current consolidation range expected to give way next week

Mon, 28 May 2007 15:00:00 GMT

* Current consolidation range expected to give way next week
* Heavy data schedule all around; Monday holidays in US, UK, and Europe
* USD correction higher versus Europe continues to stall
* Bank of Canada rate announcement on Tuesday morning

I, for one, will be very happy to see the month of May finish up next week. Another week of mostly consolidative trading saw the dollar eke out a minor gain on the week, continuing with recent patterns of new highs against the JPY and minor gains against European currencies. The troubling aspect in terms of the USD's recovery, which I mentioned last week, is how minimal the correction has been in light of interest rate changes and stock market gains. The 10 year US Treasury/Bund yield spread widened back out in favor of the USD by about 8-9 bps during the week, as US yields hit their highest levels since the end of January, but appear to have been soundly rejected from the 4.90% level. US equity gains, as seen in the DJIA, also look to be stalling, with several days over 13,500 unable to provoke fresh gains. Full text »

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05/20/2007 - G7/8 meeting unlikely to produce any currency pronouncements (outside of the Yuan)

Mon, 21 May 2007 15:00:00 GMT

* G7/8 meeting unlikely to produce any currency pronouncements (outside of the Yuan)
* JPY crosses remain favored, JPY weakness to be reinforced by G7 apathy
* Equity markets are stratospheric and at risk
* Eurozone confidence indicators, Bank of England minutes are key data

The dollar has finished another choppy week of consolidation, closing roughly unchanged vs. the Euro and about 1 yen higher against the JPY. Carry trades continue to be the main source of reliable trade opportunities, with JPY crosses persistently testing important psychological levels, such as 164.00 in EUR/JPY and 240.00 in GBP/JPY. US Treasury yields jumped about 10 bps higher as the bond market continued to cover bets on a near-term US rate cut. The data out of the US this week was the proverbial glass half full/empty, allowing traders to draw from it what they wanted. Overall, the market appears to have abandoned its extreme pessimism over the US economic outlook, but in my opinion, just at the moment when the US economy is displaying signs of a soft patch directly ahead. Full text »

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05/13/2007 - Groundhog Day consolidation continues

Mon, 14 May 2007 15:00:00 GMT

* Groundhog Day consolidation continues
* USD fighting back against European currencies
* Equity volatility may be signaling a near-term top
* BOJ MPC meeting unlikely to see rates changed

The dollar bounced back for most of last week, but its recovery already looks to be stalling before it ever really got going. The fundamentals don't appear to have played as great a role as market positioning did. Speculative EUR & GBP longs, in particular, were disappointed as rate hikes (BOE) and signals of impending rate hikes (ECB) were seen as a cue to take profit and sell. The FOMC statement was essentially unchanged and this reflects the ongoing policy holding-pattern of the US Fed. The fact that yields have backed up since the statement is more indicative of speculators covering bets on a near-term US rate cut than on any prospect of higher US rates. On the whole, we continue to hammer out a very choppy consolidation range in the major dollar pairs, and this looks set to continue. However, while the US dollar index remains above 82.00 (EUR/USD roughly below 1.3570) the bias is for further dollar-positive correction potential. Full text »

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05/06/2007 - FOMC, ECB to stay on hold; BOE expected to hike

Mon, 07 May 2007 15:00:00 GMT

* FOMC, ECB to stay on hold; BOE expected to hike
* Eurozone finance ministers gather
* US PPI and retail sales on Friday
* June G7 summit briefing on Friday

Next week should see the dollar resume weakening in light of mostly bullish events for the Euro and GBP and likely bearish events for the USD. The ECB is expected to hold rates steady when it announces its decision on Thursday, but to also indicate that another 1/4 point rate hike is coming at the June meeting. The BOE is unanimously expected by analysts to raise rates 1/4% to 5.50% at their meeting on Thursday. The Fed, in contrast, is expected to leave US rates steady at 5.25%, though they may tweak the statement language and restore the 'additional firming may yet be necessary' language. Full text »

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04/29/2007 - US 1Q GDP disappoints, but inflation pressures rise

Mon, 30 Apr 2007 15:00:00 GMT

* US 1Q GDP disappoints, but inflation pressures rise
* EUR and GBP unable to extend gains, rally stalling
* Japan's Golden Week holidays may trigger further JPY selling
* US April NFP jobs report on Friday

Another bad week for the US dollar, or was it a bad week for the Euro? The dollar remains under pressure, along with the JPY on the crosses, but European currencies are having difficulty extending their gains. And all this in a week where US data was mostly negative, culminating in the US advance 1Q GDP coming in below expectations at a 1.26% seasonally adjusted annual rate. If the market is unable to send the dollar lower after mostly deteriorating US data confirms the market's negativity, what's it going to take for the dollar to see further weakness? More likely than not, a shake out of short-US dollar/long Europe positions will be needed before the dollar can begin softening again. Full text »

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04/22/2007 - G7 - all sizzle no steak

Mon, 23 Apr 2007 15:00:00 GMT

* G7 - all sizzle no steak
* China GDP shocks the world
* Risky assets get the green light
* Dow Jones flexes its muscle

Not to beat a dead horse, but the G-7 meeting last weekend was the highlight that provided no highlights. In this new era of low volatility, put on as much risk as possible and then fund it as cheaply as possible, even a meeting of the top government financial experts provided nothing that the markets could sink their teeth into. And maybe in the final analysis, it is that very fact that provides the most insight. For if the G-7 had communicated that it would be intolerant of Euro strength above a certain level versus the yen, the market would fixate on that price and force the hand of the various central bankers. For those traders around during the 1980's, it was the bank of England who rudely discovered that if you draw a line in the sand, one that you are prepared to defend, you (the central banker) are artificially defining a currency rate that does not meet fundamental analysis. Markets are both efficient and inefficient, but always prone to debate what a central bank should and should not do. Are the finance ministers learning from past mistakes? We will leave that supposition up to the faithful. Full text »

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04/15/2007 - G7 meeting set to unleash fireworks next week

Mon, 16 Apr 2007 15:00:00 GMT

* G7 meeting set to unleash fireworks next week
* JPY is unlikely to be singled out by G7, opening door to more weakness
* EU Finance Ministers meet late next week

G-7 update: The official communique contained no surprises and did not single-out the JPY for any mention, as was largely expected. The language regarding the risks of carry trades was dropped and there was no other reference to the carry trade. The standard currency paragraph read as follows: "We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange rates closely, and cooperate as appropriate. In emerging economies with large and growing current account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur." The inclusion of language singling out China was new since the last statement in Essen, but not the first time it was used. The statement also stated that "Japan's recovery is on track and expected to continue" and that this would be recognized by investors. Separately on Saturday, the IMF released a report indicating that China would 'improve' its exchange rate mechanism and that reducing its trade surplus was a 'major objective.' It seems unlikely that China will enact any major changes immediately, but it does hold out the prospect for further, and possibly faster, Yuan appreciation going forward. Full text »

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