Fed QE2 is far from a done deal
The Fed took another baby-step toward further unconventional easing, formally indicating it would provide additional accommodation to support the economic recovery if necessary. Previously, only comments by Fed Chair Bernanke had signaled such actions. The FOMC statement also noted low inflation levels and hinted at policy actions to restore inflation to normal levels over time. Markets reacted as though the Fed had actually changed policy, as opposed to sending signals, but the moves appear to have some force: the USD weakened, gold soared, stocks rallied and Treasury yields dropped around 20 bps.
We think it's important to note that the Fed statement does not mean that additional easing is necessarily forthcoming. For one, the US recovery will need to see further deterioration before the debate can be settled and additional easing agreed upon. In contrast, the most recent US data (e.g. housing and durable goods orders) suggests some stabilization after the weakness seen during the summer. Secondly, additional Fed action is unlikely before the Nov. 3 meeting, suggesting some of the recent moves may have been premature and/or excessive. Indeed, 10 year US Treasury yields recovered half of the post-Fed decline by the end of the week. Thirdly, additional unconventional easing takes the Fed into largely uncharted territory, not to mention effectively using up the last of the Fed's policy tools. Lastly, and perhaps most importantly, is that there are no guarantees additional easing from the Fed will actually succeed in boosting the US economy. High unemployment and weak final demand seem unlikely to be affected by lower interest rates, assuming any Fed actions actually result in lower market rates. We think the state of and prospects for the US recovery will need to be far worse than currently the case, not just to convince FOMC members that more action is warranted, but to leave them no alternative to taking the plunge. In short, the market reaction to the Fed shift may be excessive in the short-run, and we will be closely following US Treasury yields for any rebounds to pre-FOMC levels as evidence of that.
Is it Lose-Lose for the USD?
The USD reaction to the Fed shift in language was unambiguously negative, as US rates dropped and markets dumped the greenback on the prospect of additional easing measures. EUR/USD blew through the 1.3150/60 level we highlighted last week, surpassed the prior 1.3330 highs and effectively tested the 1.3500 level. At the same time, risk assets also responded positively, with stocks, commodities, and JPY-crosses all moving higher, further diminishing the USD's appeal. It would seem, then, that we're left with an environment where bad US news is met by further USD selling as the likelihood of additional Fed easing increases, and good US news is similarly met by USD selling as risk assets are bought. Such a lose-lose, Catch 22 situation is inherently unstable, but can also be the recipe for a sustained trend lower in the USD. Another recent driver of EUR/USD gains in recent weeks has been widening 2-year rate spreads in favor of German bunds and against US notes (hence higher EUR/USD). That spread peaked this past Tuesday at -38 bps and finished out the week at -28 points, suggesting one source of EUR/USD strength may be diminishing. See below for further discussion of EUR frailties.
Next week sees month-end and quarter-end, and along with the usual volatility we think there is additional potential for USD selling, as asset managers sell more USD to rebalance hedges after monthly and quarterly gains in US stock indexes. But similar gains in non-US indexes may offset this USD-selling to some degree, so it's not clear-cut. Also, we have reached some important technical levels that bear watching. The 1.3510/20 level in EUR/USD is the 50% retracement of the Nov. 2009 highs-June 2010 lows. The US dollar index is also sitting on key support at the bottom of the weekly Ichimoku cloud at 79.33. If those levels were to break, we would reckon with further USD weakness overall, and another surge higher in EUR/USD, likely to the 1.3750/3800 area next. Immediate support for the move higher in EUR/USD is now at 1.3300/50, where a drop below may signal the start of a potential reversal.
Precious metals shine
Gold marched to new record levels this week, reaching highs around $1300 an ounce. The yellow metal closed at record highs for five consecutive sessions as expectations that central bank action will erode the value of currencies resulted in investors seeking safety elsewhere. The Fed said in its FOMC statement on Tuesday that it “is prepared to provide additional accommodation if needed”. Many viewed this as a hint towards another round of quantitative easing. The precious metals benefited as the dollar weakened significantly amid the speculation of more asset purchases by the Fed. Gold prices tend to move inversely to the U.S. dollar so it is not surprising to see demand for gold increase as investors sell the buck. Moreover, the risk to holding major currencies has driven the market toward the metals. Sovereign debt issues are still lurking in Europe’s fragile economy, the BOE joined the Fed this week in considering additional stimulus, and anticipation of another wave of BOJ intervention make gold and silver look more attractive.
Silver did not go unnoticed as it surpassed the March 2008 highs of roughly $21.35 to reach levels that have not been seen in 30 years. Silver has outpaced gold so far this year, gaining about 26% while gold is up about 18%. With interest rates at low levels and risks to holding currencies as central banks move closer to providing additional stimulus, traders are looking towards the metals for returns.
While we think the current trend higher will continue, we would be cautious to establish longs at current levels. XAU/USD is just under rising channel resistance which is currently around the 1300/02 level. Rising channel support is parallel to the resistance and comes in around 1265. The prices have been contained within this bullish channel since the end of July. Some key levels within the channel are the 23.6% retracement level around 1285 and the 1270/72 pivot. A move below the channel support and 61.8% Fibonacci retracement around 1260 is likely to see a deeper correction towards 1240 and a break above the channel resistance with a move above 1310 may see gains extend.
Stronger euro out of synch with fundamentals
Europe’s economic fundamentals might be deteriorating, but that hasn’t been enough to stop the euro in its tracks. The plunge in the Eurozone’s composite PMI sentiment survey for September, down to 53.8 from 56.2 in August, was the strongest signal yet that the economic recovery is losing momentum. Yet the euro is still trading at five-month highs.
So what is fuelling the single currency? Rather than ditch the euro, investors instead are targeting the problem peripheral economies directly. Investors demanded a higher risk premium to buy Irish and Portuguese government debt at auctions this week, pushing up their funding costs just as growth appears to be stalling. The cost to insure against an Irish default rose to EUR463,000 for EUR10m exposure, according to five-year credit-default swap prices, after it was announced that the Irish economy returned to recession in the second quarter. This compares with the core economies that are still fairly resilient; for example, Germany’s IFO business climate sentiment index rose to a 3-year high in September.
Government bond yields in Spain also came under pressure prior to finance minister Elena Salgado announcing the 2011 budget this afternoon. Yields eased by the end of the European session as markets cheered Spain’s tough austerity programme for next year. Some commentators have noted that the worst is already priced in for Europe’s peripheral economies, most notably Ireland. Yet if governments don’t fulfil their plans to cut deficits then the markets may punish them once more.
Euro strength is also a function of dollar weakness. Investors have turned bearish on the greenback as speculation mounts that the Fed will increase the monetary base to stimulate the US’s lacklustre economic recovery. In comparison, the ECB have not signalled another round of monetary stimulus, although they are buying government bonds as a way to reduce pressure on the peripheral economies’ bond spreads.
The rally in the euro is a fragile one for two reasons. Firstly, if growth is slowing in Europe then the interest rate differential between the US and Europe – currently in the euro’s favour, will start to reverse. Secondly, the frequency of Eurozone debt problems spooking the market is increasing. If this continues then we expect to see sentiment toward the euro to begin to erode.
Softening data and the latest MPC Minutes release suggests further easing ahead
Last week’s stream of negative data continued this week providing evidence of a stalling recovery in the United Kingdom. Monday saw the release of August Mortgage Approvals print a disappointing 45k vs. expected 46k and a prior 47k in July. Thursday’s release of the August BBA Loans for House Purchase did nothing to allay fears of a stagnating UK housing market as it too disappointed with a 31767 print against expectations of 34000. The trend in data deterioration has not been confined to the housing market, sour remnants from last week’s August Jobless Claims Change (increased to 2.3k vs. an expected -3k decline) and August Retail Sales ex Auto MoM (-.4% vs. expected +0.2%) suggest an economy facing significant headwinds to growth prospects. Continued moderation in UK data may deem economic resuscitation a necessity in the near future. The latest release of the MPC Minutes suggests the Bank of England would be ready to meet such a need: ‘The Committee considered arguments in favor of a further easing in the stance of monetary policy’.
A marked deterioration in the domestic and global growth outlook, which we believe to be a likely possibility, may push the Committee’s hand to take part in another round of QE; either in the form of gilt purchases or credit easing via direct buying of private sector assets from the market. The timing of further easing will be dependent on the rate of data degradation in the weeks ahead. Next week’s final 2Q GDP release is likely to be in line with expectations of 1.2% for the quarter and 1.7% for the year. The MPC tends to regard survey data as an effective indicator of current economic health and is likely to focus on upcoming manufacturing and service sector releases to determine whether QE2 will be undertaken sooner (November) or later (Q1 2011). With impending budget cuts scheduled in October, our view is that further stimulus is more likely to occur later, after the impacts of budget tightening are fully assessed. Key technical levels to watch in the week ahead are the psychologically significant 1.6000/50 resistance zone (38.2% retracement for the 7/08 to 1/09 primary decline) and the psychologically significant 1.5500/25 support zone (April to late July highs). The underpinnings of a struggling economy suggest weakness may be in store for the cable and we believe any strength towards the aforementioned resistance level may present an opportunity to take advantage of a medium-term correction lower.
Key data and events to watch next week
U.S. data starts off on Monday with the August Chicago Fed National Activity index and the Dallas Fed manufacturing outlook survey for September. Tuesday sees the July S&P/Case Shiller Home Price index, September consumer confidence, and the September Richmond Fed manufacturing index. The Fed’s Lockhart speaks on Tuesday while the Fed’s Plosser and Rosengren speak on Wednesday. Thursday sees 2Q final GDP, weekly jobless claims, and the September Chicago PMI. Friday rounds out the week with August personal income and spending, PCE, ISM manufacturing, and final Sept. Michigan confidence.
The Euro zone kicks off the week on Monday with speeches by ECB Pres. Trichet and VP Constancio. German October GfK confidence and September preliminary CPI will be released on Tuesday. Wednesday sees the September EZ business climate indicator and EC confidence figures, along with the monthly meeting of EU Fin. Mins. Thursday sees France’s August PPI, Germany’s September employment data, and the EZ CPI estimate for September. Friday finishes the week off with German retail sales for August, final September manufacturing PMI's and the EZ unemployment rate for August.
The U.K. economic data begins with Monday’s Hometrack housing survey for September. Tuesday sees a speech by the BOE’s Posen and 2Q final GDP, current account, and total business investment. Wednesday sees August net consumer and mortgage lending and the September GfK Consumer confidence survey. Thursday includes a speech by the BOE's Tucker as well as Nationwide House prices for September and Friday wraps up the week with September manufacturing PMI.
Japan’s calendar starts off with a speech by BOJ Governor Shirakawa on Sunday. The BOJ Governor speaks again on Monday and August Merchandise Trade Balance data is also set for release. Due out on Tuesday is September small business confidence and Wednesday sees the Tankan Survey results for 3Q. Thursday sees August retail sales, housing starts, construction orders, and August preliminary industrial production. Friday finishes things off with August employment data, household spending, and national CPI..
Canada’s data begins on Wednesday with industrial product and raw materials prices for August. Thursday ends a short week of data with July GDP and a speech by BOC Governor Mark Carney.
The calendar down under starts on Wednesday with New Zealand’s August trade balance and Australia’s Conference Board Leading index. Thursday will see NZ building permits for August and the September NBNZ activity outlook and business confidence numbers. Also set for release on Thursday is Australian HIA new home sales, building approvals, and private sector credit all for the month of August. Friday finishes the week with the September RBA commodity index and September AiG Performance of Manufacturing index.
Be on the lookout for important China data as well. August industrial profits are due on Monday, the September HSBC manufacturing PMI is due on Wednesday, and September manufacturing PMI is set for release on Friday. Sometime between Sunday and Wednesday the August Leading index will be released.
Selling AUD/USD for a correction lower
Support
0.9450 Prior intra-day high
0.9402 Daily Ichimoku Tenkan line; prior daily highs
0.9200 21-day simple moving average; daily Kijun line 0.9188
Resistance
0.9600 Sept. 22 intra-day high; rumored RBA intervention level
0.9710 All-time daily close high
0.9800 Psychological resistance; all-time intra-day high at 0.9845/50
Comments
The Australian dollar has come a long way on the back of solid Australian data, hawkish RBA comments, and overall USD weakness, and now (0.9550) stands about 300 points below its all-time high around 0.9850, and about 150 points below its all-time daily close high. We think the long AUD trade has become overstretched in terms of popularity and positioning, raising the potential for a near-term correction lower. Market-talk on Wed. Sept. 22 rumored that the RBA had quietly intervened, selling AUD/USD at the 0.9600 level. The RBA is traditionally a stealthy player and inclined to step in on excessive AUD weakness or strength, so we think there may be some truth to these reports and this inclines us to sell remaining strength in AUD/USD. On the USD, we think some of the current USD weakness is premature based on markets pricing in a second round of Fed asset purchases, when that outcome is far from clear-cut. At the minimum, the Fed will not announce such steps until the Nov. meeting, and there is plenty of time for data to stabilize between now and then, eliminating the need for additional easing. We think the potential is ripe for the USD to recover as markets re-think the certainty of Fed QE2 in the weeks ahead.
We would note that a strategy to sell AUD/USD at this time is clearly counter-trend and thus carries greater risk, so we will keep stop losses relatively tight. The Strategy is to sell half of a short AUD/USD position at current market levels of 0.9550 and to sell the second half at 0.9650 for an average short rate of 0.9600. The stop loss will be at 0.9730, for a risk of around 130 pips. The take profit will be for 50% at 0.9350, just above Sept. 16 lows for the current extension, and for the second 50% at 0.9200, for an average take profit of 0.9275 and a potential gain of 325 pips. We would lower the stop to 0.9500 on a daily close below 0.9450 and cancel any remaining selling orders.
Monday, September 27, 2010
Tuesday, September 21, 2010
Pre-FOMC Plan To SEll EURUSD Into Fed Statement
the Fed will complete the latest policy meeting and announce a widely anticipated no change to interest rates. The real focus will be centered on the accompanying statement that could yield a variety of outcomes to future policy. The Fed is expected to acknowledge economic weakness, but what the Fed plans to do to counter that economic weakness will be the kicker. Will a possible $1T in US treasury purchases be waiting in the wings if economic data is to soften in the future? Will the Fed counter coming economic weakness with talk of further accommodative policy for an extended period of time? All these questions need to be answered to give the market much needed guidance.
However, the market feel over the past 3-5 sessions is suggestive that risk-bears have gone into hibernation in early Fall and are prepared to join the risk-on parade. My preferred wave counts have changed and the alternate counts kick in. They disagree with a new rally in risk and will do so until key levels are broken. The S&P faces monster resistance at around 1155, as the US 10 yr yield still remains below 2.8%. The USDX is still trading above 80.80 support, where as EURUSD is continued below 1.3200 support. Oil is 1.15% lower on the session as copper futures are still below $350/ton. My updated wave count in EURUSD shows a possible A-B-C correction pending completion at 1.3200. We have had very good success fading major economic data into key technical levels over the past month , so with light size we will do so again. I am selling 1 unit of EURSUD at 1.3175, another unit at 1.3200, and will stop out for both units at 1.3240. My concern is if we are triggered short, but the S&P is still considerably away from 1155 resistance. If this occurs, I will likely cut a portion of my short EURUSD and allow the S&P to move higher. If they occur at the same time, I will have greater conviction in this trade.
However, the market feel over the past 3-5 sessions is suggestive that risk-bears have gone into hibernation in early Fall and are prepared to join the risk-on parade. My preferred wave counts have changed and the alternate counts kick in. They disagree with a new rally in risk and will do so until key levels are broken. The S&P faces monster resistance at around 1155, as the US 10 yr yield still remains below 2.8%. The USDX is still trading above 80.80 support, where as EURUSD is continued below 1.3200 support. Oil is 1.15% lower on the session as copper futures are still below $350/ton. My updated wave count in EURUSD shows a possible A-B-C correction pending completion at 1.3200. We have had very good success fading major economic data into key technical levels over the past month , so with light size we will do so again. I am selling 1 unit of EURSUD at 1.3175, another unit at 1.3200, and will stop out for both units at 1.3240. My concern is if we are triggered short, but the S&P is still considerably away from 1155 resistance. If this occurs, I will likely cut a portion of my short EURUSD and allow the S&P to move higher. If they occur at the same time, I will have greater conviction in this trade.
Monday, September 20, 2010
Weekly Overview and Strategy
USD weakness looks suspect
The USD took a hit in the past week as better Chinese data supported global recovery prospects, weakening safe haven dollar demand, and markets responded to talk the Fed may undertake a second round of quantitative easing (QE). The greenback also likely weakened as the Chinese stepped back from dollar-buying intervention and allowed the RMB to strengthen. The Chinese data suggest a soft-landing has been achieved there and that is indeed supportive for the global outlook, and especially for commodity and regional currencies (e.g. AUD in particular) that benefit from Chinese growth. However, the other developments cited above are likely temporary in nature, suggesting potential for the USD to rebound in coming weeks. The talk of additional Fed QE seems premature given the split among FOMC members, with most content to maintain current policy and others openly questioning the effectiveness of QE. While US data has deteriorated, it does not yet reflect the 'appreciably' worse outlook Fed Chair Bernanke has indicated would be the trigger for additional unconventional policy measures. Judging by recent FOMC minutes, the subject of QE has barely been discussed, much less settled, so the prospect for additional asset purchases at this time seems highly remote. As such, USD weakness may dissipate following the FOMC meeting next Tuesday (Sept. 21). USD weakness emanating from China stepping back from managing the Yuan (RMB) seems similarly set to evaporate if they return to pattern (see more below).
To gauge the potential for a USD rebound, we will closely monitor the 1.2920/50 support level in EUR/USD, which was the recent range high and the break-level for recent EUR gains, and upside potential remains while price holds above. Keep in mind the German ZEW economic sentiment gauge has plunged from +53.0 in April to -4.3 in September, an indication of deteriorating 6-month outlooks. If EUR/USD does drop back below the range break at 1.2920/50, we would anticipate a test of prior range lows around 1.2590/2620 at the minimum, and very likely a break below toward 1.2450/80 initially. Convincing strength above 1.3150/60 will be needed to mount a challenge to recent 1.3330 highs and test the psychological 1.3500 level next.
JPY intervention may be the real deal
Fresh off a victory in an intra-party election, Japanese PM Kan ordered the MOF to take action to counter the strong JPY, according to comments on Friday from Fin. Min. Noda. The resulting BOJ intervention caught many market players off-guard and the reported size of the intervention, estimated at between 10-20 bio USD worth, would be unprecedented for a single day's salvo. Also, in contrast to prior interventions, the JPY being sold are not being sterilized, meaning the BOJ is not selling short-term finance bills and is leaving JPY in the market. Additionally, BOJ Gov. Shirakawa has indicated the BOJ is cooperating at the direction of the MOF on the overall intervention effort, suggesting the two institutions are in agreement on the need to weaken the JPY, in contrast to prior interventions when they worked at cross-purposes. As well, the BOJ has indicated it will provide virtually unlimited liquidity, meaning the MOF has nearly unlimited resources for intervention. Taken together, it appears the Japanese government is firmly committed to countering JPY-strength and we would not underestimate their ability to prevent renewed JPY-gains. As such, we would not expect to see USD/JPY much below 84 any time soon and the risk is for further gains to the 90.00 area, once above the 86.00/50 area. In the JPY-crosses, with USD/JPY downside likely limited by intervention, any major JPY-cross selling on risk aversion seems likely to disproportionately affect the non-JPY dollar pairs (e.g. AUD/USD would likely fall more than USD/JPY if AUD/JPY is being sold).
Increased speculation on quantitative easing
Speculation that the Fed could embark on a further stage of quantitative easing stepped up a gear earlier this week when the Wall Street Journal reported that a well-known investment house expects the Fed to announce new asset purchases as early as November, earlier than the market expects.
Whether this will happen remains to be seen. There are still major hurdles the Fed has to pass before they could embark on more monetary stimulus. Firstly, it was reported that at its August meeting seven of the 17 officials at the Fed either expressed reservation or disagreed with the plan to maintain the size of the Fed’s balance sheet and reinvest the proceeds of maturing mortgage-backed assets. This suggests that the Fed is unlikely to come to an agreement on more QE in the near-term. On top of that, the tone of economic data has been somewhat stronger in September. The ISM rebounded and retail sales were also stronger in August after contracting in July. The trigger to further QE is going to be the labor market. If growth doesn’t pick up enough to see a drop in the unemployment rate, currently at 9.6 per cent, then the chances of more QE are likely.
The UK is also pondering a further round of QE. This week Bank of England governor Mervyn King said the Bank remains ready to act if necessary. Speaking at the annual Trade Union Congress in Manchester, King said that monetary policy remains the best tool for managing the recovery in the short term, however if the recovery proves to be slower than the Bank expected the BOE can “react”. Adam Posen, MPC member, speaking at a conference in Washington, said the BOE’s back-up plan should be heavy duty purchases of private assets. Up until now the Bank has only bought government debt such as gilts, however Posen argues if further policy action is deemed necessary then it shouldn’t be QE 2. Instead the Bank should adopt a form of credit easing and buy private-sector assets directly from the market.
Although inflation has proven to be stickier than many expected - the headline rate moved back up to 3.1 per cent in August – this is unlikely to get in the way of another round of monetary stimulus. The Bank remains of the view that the large amount of spare capacity in the economy should have a downward impact on inflation in the medium term. Overall, it is unlikely that further stimulus will be implemented in the UK until there is a clear view on the impact of impending budget cuts on economic growth.
Renminbi strength unlikely to continue
In what is being seen as a gesture to US authorities eager to label China a currency manipulator, Beijing allowed the renminbi (aka RMB or yuan) to strengthen nearly 1% against the dollar this week. The move came prior to the testimony of Treasury Secretary Geithner at congressional hearings on China’s FX policy. As China reduced its massive purchases of dollars, typically in excess of $1bn a day, the greenback experienced broad-based weakness against the major currencies.
But China’s overture did little to stem Washington’s anger over what it sees as China’s unreasonable behavior, especially since signs of a slowdown in growth in the emerging market powerhouse have receded in recent weeks. Geithner stepped up his rhetoric, saying China had substantially undervalued its currency, which puts US exporters at a disadvantage. However, he stopped short of calling for direct action, and made it clear to the committees that calling China a currency manipulator would essentially be useless.
Beijing responded in typical fashion, saying that it would not respond to pressure to revalue its currency. Later, the People’s Bank of China (PBOC), the Chinese central bank, said swings in the value of the dollar may threaten the global recovery and defended the benefits of currency stability. This suggests that China could resume its purchases of dollars in the near-term, causing the yuan to drift lower in the coming weeks. The next focal point will be mid-October when the US Treasury is scheduled to release its report on currency manipulation.
Gold advances to new record levels
The yellow metal has shined this past week, outperforming the usual safe havens (USD, CHF, and JPY). Government and central bank actions this week have diminished the demand for the safe haven currencies resulting in higher gold prices as investors seek safety amid economic uncertainty. To recap, Tuesday saw XAU/USD gain +1.83% as the greenback declined on speculation of another round of asset purchases by the Fed as early as November. The prospect of another $1 trillion in quantitative easing coupled with the highest price of the yuan since 1993 (reportedly due to fears of trade sanctions) sent the buck plummeting. The softening dollar aided higher gold prices as gold usually moves inversely to the U.S. currency.
Gold extended gains as the Bank of Japan intervened in the currency markets to stem the strengthening yen and as the Swiss National Bank held rates steady and issued a surprisingly dovish statement. As key central banks effectively weakened their currencies, safe haven flows favored gold pushing prices to new record levels of nearly $1,283.
While the central banks and governments continue their campaigns to be ‘competitive’ in the area of exports by actively depreciating their currencies, the true safe haven emerges in the form of a yellow metal. There is no central bank acting to depreciate the value of gold and it cannot be printed as many governments may do with their currency. This is why we have seen gold continue to break records levels. We would be reluctant to establish longs at current levels however. We expect to see a short term pause or correction as a result of profit taking and remain on the sidelines for now. A near term pull back in XAU/USD is likely to find support on its 21-day sma around 1247/48; below here may see the next key support level around 1217/18 where the 55 and 100-day sma’s converge. While the bias remains higher, the upside is likely to see profit taking ahead of the key $1300 level. A sustained break above this level should see gains extend.
Key data and events to watch next week
U.S. economic data kicks off the week on Monday with NAHB Housing Market index for September. Tuesday sees August housing starts, building permits, and the FOMC rate decision and statement. Wednesday has the House Price index for July and Thursday sees weekly jobless claims, August existing home sales and leading indicators. Friday wraps the week up with durable goods orders and new home sales for August as well as speeches by the Fed’s Lacker and Fed Chairman Ben Bernanke.
The Eurozone starts the action off on Tuesday as German Chancellor Angela Merkel and Luxembourg PM Jean-Claude Juncker are scheduled to speak. Wednesday will see Eurozone industrial new orders for July and EZ consumer confidence for September. French September business confidence and production outlook indicators are on deck for Thursday. Also due out Thursday is preliminary manufacturing and services PMI for France, Germany, and the Eurozone. Friday sees Germany’s August import price index and September IFO survey results.
U.K. data begins on Monday with the September Rightmove House prices figures, August preliminary M4 money supply and mortgage approvals for August. The Bank of England’s Andrew Sentence will speak in London on Monday. Tuesday’s data includes August public finances and public sector net borrowing and a speech by the BOE’s Andrew Bailey. On deck for Wednesday is the Bank of England minutes and a speech by the BOE’s Spencer Dale. Thursday finishes the week with August BBA loans for house purchase.
Japan begins the week with the release of its July final coincident and leading index numbers as well as August final machine orders on Tuesday. Wednesday finishes the week with the July All Industry Activity index and August supermarket sales as well as a speech by Bank of Japan Board Member Miyao.
Canada’s economic data starts with Monday’s international securities transactions and wholesale sales for July. Tuesday sees August CPI numbers and Canadian Finance Minister Jim Flaherty speaking in Ottawa. Wednesday finishes up with August leading indicators and July retail sales.
The calendar down under starts on Monday with a speech by RBA Governor Glenn Stevens, New Zealand’s August Performance Services index, and the September ANZ consumer confidence index. Tuesday’s data includes NZ August credit card spending and the RBA’s September minutes. Wednesday sees the July Westpac Leading index, NZ current account balance. New Zealand’s 2Q GDP figures are out on Thursday.
Be on the lookout for important China data as well. Friday will see the MNI Business Conditions survey for September.
Strategy
Buying AUD/JPY for a Risk Rebound
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AUD/JPY
Support
74.00 Daily close low for current decline
73.50/60 Daily trend line support; intra-day lows for current decline; possible double bottom; weekly Ichimoku cloud bottom (73.82)
72.70 Early July Tweezers bottom lows
Resistance
75.70 Daily Ichimoku Tenkan line
76.70 Daily Ichimoku Kijun line
77.25 21 and 55-day simple moving averages (sma)
Risky assets (stocks, commodities, JPY-crosses) have been under intense pressure over the last few weeks as incoming data and news continue to highlight a deteriorating outlook for the global recovery. While we expect continuing weak data in the weeks and months ahead, we think markets may be completing the first wave of risk liquidations and that we are due for a correction higher in risky assets. Price action over the last two days has been quite resilient (initially down in risk, followed by a rebound) in the face of seemingly ever-worsening news, supporting the view that the current risk sell-off may be basing out. AUD/JPY is among the most highly correlated currency pairs to stocks and other risk assets, and it has made a potential short-term double bottom on recent lows at 73.50/60, which is also key daily trend line support and the base of a broad sideways consolidation triangle since late May. Buying AUD/JPY on current weakness anticipates a rebound to upper end of the recent range in the 77.00/79.00 area, where we would look to take profit and ultimately establish shorts for the next round of risk sell-off.
Readers should note that buying AUD/JPY on remaining weakness is a counter-trend trade and stops will need to be diligently followed. The strategy is to buy half of a long AUD/JPY position at current market levels of 74.80 and to buy the second half at 73.90 for an average long rate of 74.35. The stop will be kept tight at just below recent lows for this decline at 73.30 for a total risk of just over 100 pips. The take profit will be for 50% at 77.00 (just below 21/55 day sma) and for the remaining 50% at 78.50 for an average t/p rate of 77.75. If we see the rebound, we'll update with a potential short strategy from the upper end of the range.
The USD took a hit in the past week as better Chinese data supported global recovery prospects, weakening safe haven dollar demand, and markets responded to talk the Fed may undertake a second round of quantitative easing (QE). The greenback also likely weakened as the Chinese stepped back from dollar-buying intervention and allowed the RMB to strengthen. The Chinese data suggest a soft-landing has been achieved there and that is indeed supportive for the global outlook, and especially for commodity and regional currencies (e.g. AUD in particular) that benefit from Chinese growth. However, the other developments cited above are likely temporary in nature, suggesting potential for the USD to rebound in coming weeks. The talk of additional Fed QE seems premature given the split among FOMC members, with most content to maintain current policy and others openly questioning the effectiveness of QE. While US data has deteriorated, it does not yet reflect the 'appreciably' worse outlook Fed Chair Bernanke has indicated would be the trigger for additional unconventional policy measures. Judging by recent FOMC minutes, the subject of QE has barely been discussed, much less settled, so the prospect for additional asset purchases at this time seems highly remote. As such, USD weakness may dissipate following the FOMC meeting next Tuesday (Sept. 21). USD weakness emanating from China stepping back from managing the Yuan (RMB) seems similarly set to evaporate if they return to pattern (see more below).
To gauge the potential for a USD rebound, we will closely monitor the 1.2920/50 support level in EUR/USD, which was the recent range high and the break-level for recent EUR gains, and upside potential remains while price holds above. Keep in mind the German ZEW economic sentiment gauge has plunged from +53.0 in April to -4.3 in September, an indication of deteriorating 6-month outlooks. If EUR/USD does drop back below the range break at 1.2920/50, we would anticipate a test of prior range lows around 1.2590/2620 at the minimum, and very likely a break below toward 1.2450/80 initially. Convincing strength above 1.3150/60 will be needed to mount a challenge to recent 1.3330 highs and test the psychological 1.3500 level next.
JPY intervention may be the real deal
Fresh off a victory in an intra-party election, Japanese PM Kan ordered the MOF to take action to counter the strong JPY, according to comments on Friday from Fin. Min. Noda. The resulting BOJ intervention caught many market players off-guard and the reported size of the intervention, estimated at between 10-20 bio USD worth, would be unprecedented for a single day's salvo. Also, in contrast to prior interventions, the JPY being sold are not being sterilized, meaning the BOJ is not selling short-term finance bills and is leaving JPY in the market. Additionally, BOJ Gov. Shirakawa has indicated the BOJ is cooperating at the direction of the MOF on the overall intervention effort, suggesting the two institutions are in agreement on the need to weaken the JPY, in contrast to prior interventions when they worked at cross-purposes. As well, the BOJ has indicated it will provide virtually unlimited liquidity, meaning the MOF has nearly unlimited resources for intervention. Taken together, it appears the Japanese government is firmly committed to countering JPY-strength and we would not underestimate their ability to prevent renewed JPY-gains. As such, we would not expect to see USD/JPY much below 84 any time soon and the risk is for further gains to the 90.00 area, once above the 86.00/50 area. In the JPY-crosses, with USD/JPY downside likely limited by intervention, any major JPY-cross selling on risk aversion seems likely to disproportionately affect the non-JPY dollar pairs (e.g. AUD/USD would likely fall more than USD/JPY if AUD/JPY is being sold).
Increased speculation on quantitative easing
Speculation that the Fed could embark on a further stage of quantitative easing stepped up a gear earlier this week when the Wall Street Journal reported that a well-known investment house expects the Fed to announce new asset purchases as early as November, earlier than the market expects.
Whether this will happen remains to be seen. There are still major hurdles the Fed has to pass before they could embark on more monetary stimulus. Firstly, it was reported that at its August meeting seven of the 17 officials at the Fed either expressed reservation or disagreed with the plan to maintain the size of the Fed’s balance sheet and reinvest the proceeds of maturing mortgage-backed assets. This suggests that the Fed is unlikely to come to an agreement on more QE in the near-term. On top of that, the tone of economic data has been somewhat stronger in September. The ISM rebounded and retail sales were also stronger in August after contracting in July. The trigger to further QE is going to be the labor market. If growth doesn’t pick up enough to see a drop in the unemployment rate, currently at 9.6 per cent, then the chances of more QE are likely.
The UK is also pondering a further round of QE. This week Bank of England governor Mervyn King said the Bank remains ready to act if necessary. Speaking at the annual Trade Union Congress in Manchester, King said that monetary policy remains the best tool for managing the recovery in the short term, however if the recovery proves to be slower than the Bank expected the BOE can “react”. Adam Posen, MPC member, speaking at a conference in Washington, said the BOE’s back-up plan should be heavy duty purchases of private assets. Up until now the Bank has only bought government debt such as gilts, however Posen argues if further policy action is deemed necessary then it shouldn’t be QE 2. Instead the Bank should adopt a form of credit easing and buy private-sector assets directly from the market.
Although inflation has proven to be stickier than many expected - the headline rate moved back up to 3.1 per cent in August – this is unlikely to get in the way of another round of monetary stimulus. The Bank remains of the view that the large amount of spare capacity in the economy should have a downward impact on inflation in the medium term. Overall, it is unlikely that further stimulus will be implemented in the UK until there is a clear view on the impact of impending budget cuts on economic growth.
Renminbi strength unlikely to continue
In what is being seen as a gesture to US authorities eager to label China a currency manipulator, Beijing allowed the renminbi (aka RMB or yuan) to strengthen nearly 1% against the dollar this week. The move came prior to the testimony of Treasury Secretary Geithner at congressional hearings on China’s FX policy. As China reduced its massive purchases of dollars, typically in excess of $1bn a day, the greenback experienced broad-based weakness against the major currencies.
But China’s overture did little to stem Washington’s anger over what it sees as China’s unreasonable behavior, especially since signs of a slowdown in growth in the emerging market powerhouse have receded in recent weeks. Geithner stepped up his rhetoric, saying China had substantially undervalued its currency, which puts US exporters at a disadvantage. However, he stopped short of calling for direct action, and made it clear to the committees that calling China a currency manipulator would essentially be useless.
Beijing responded in typical fashion, saying that it would not respond to pressure to revalue its currency. Later, the People’s Bank of China (PBOC), the Chinese central bank, said swings in the value of the dollar may threaten the global recovery and defended the benefits of currency stability. This suggests that China could resume its purchases of dollars in the near-term, causing the yuan to drift lower in the coming weeks. The next focal point will be mid-October when the US Treasury is scheduled to release its report on currency manipulation.
Gold advances to new record levels
The yellow metal has shined this past week, outperforming the usual safe havens (USD, CHF, and JPY). Government and central bank actions this week have diminished the demand for the safe haven currencies resulting in higher gold prices as investors seek safety amid economic uncertainty. To recap, Tuesday saw XAU/USD gain +1.83% as the greenback declined on speculation of another round of asset purchases by the Fed as early as November. The prospect of another $1 trillion in quantitative easing coupled with the highest price of the yuan since 1993 (reportedly due to fears of trade sanctions) sent the buck plummeting. The softening dollar aided higher gold prices as gold usually moves inversely to the U.S. currency.
Gold extended gains as the Bank of Japan intervened in the currency markets to stem the strengthening yen and as the Swiss National Bank held rates steady and issued a surprisingly dovish statement. As key central banks effectively weakened their currencies, safe haven flows favored gold pushing prices to new record levels of nearly $1,283.
While the central banks and governments continue their campaigns to be ‘competitive’ in the area of exports by actively depreciating their currencies, the true safe haven emerges in the form of a yellow metal. There is no central bank acting to depreciate the value of gold and it cannot be printed as many governments may do with their currency. This is why we have seen gold continue to break records levels. We would be reluctant to establish longs at current levels however. We expect to see a short term pause or correction as a result of profit taking and remain on the sidelines for now. A near term pull back in XAU/USD is likely to find support on its 21-day sma around 1247/48; below here may see the next key support level around 1217/18 where the 55 and 100-day sma’s converge. While the bias remains higher, the upside is likely to see profit taking ahead of the key $1300 level. A sustained break above this level should see gains extend.
Key data and events to watch next week
U.S. economic data kicks off the week on Monday with NAHB Housing Market index for September. Tuesday sees August housing starts, building permits, and the FOMC rate decision and statement. Wednesday has the House Price index for July and Thursday sees weekly jobless claims, August existing home sales and leading indicators. Friday wraps the week up with durable goods orders and new home sales for August as well as speeches by the Fed’s Lacker and Fed Chairman Ben Bernanke.
The Eurozone starts the action off on Tuesday as German Chancellor Angela Merkel and Luxembourg PM Jean-Claude Juncker are scheduled to speak. Wednesday will see Eurozone industrial new orders for July and EZ consumer confidence for September. French September business confidence and production outlook indicators are on deck for Thursday. Also due out Thursday is preliminary manufacturing and services PMI for France, Germany, and the Eurozone. Friday sees Germany’s August import price index and September IFO survey results.
U.K. data begins on Monday with the September Rightmove House prices figures, August preliminary M4 money supply and mortgage approvals for August. The Bank of England’s Andrew Sentence will speak in London on Monday. Tuesday’s data includes August public finances and public sector net borrowing and a speech by the BOE’s Andrew Bailey. On deck for Wednesday is the Bank of England minutes and a speech by the BOE’s Spencer Dale. Thursday finishes the week with August BBA loans for house purchase.
Japan begins the week with the release of its July final coincident and leading index numbers as well as August final machine orders on Tuesday. Wednesday finishes the week with the July All Industry Activity index and August supermarket sales as well as a speech by Bank of Japan Board Member Miyao.
Canada’s economic data starts with Monday’s international securities transactions and wholesale sales for July. Tuesday sees August CPI numbers and Canadian Finance Minister Jim Flaherty speaking in Ottawa. Wednesday finishes up with August leading indicators and July retail sales.
The calendar down under starts on Monday with a speech by RBA Governor Glenn Stevens, New Zealand’s August Performance Services index, and the September ANZ consumer confidence index. Tuesday’s data includes NZ August credit card spending and the RBA’s September minutes. Wednesday sees the July Westpac Leading index, NZ current account balance. New Zealand’s 2Q GDP figures are out on Thursday.
Be on the lookout for important China data as well. Friday will see the MNI Business Conditions survey for September.
Strategy
Buying AUD/JPY for a Risk Rebound
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AUD/JPY
Support
74.00 Daily close low for current decline
73.50/60 Daily trend line support; intra-day lows for current decline; possible double bottom; weekly Ichimoku cloud bottom (73.82)
72.70 Early July Tweezers bottom lows
Resistance
75.70 Daily Ichimoku Tenkan line
76.70 Daily Ichimoku Kijun line
77.25 21 and 55-day simple moving averages (sma)
Risky assets (stocks, commodities, JPY-crosses) have been under intense pressure over the last few weeks as incoming data and news continue to highlight a deteriorating outlook for the global recovery. While we expect continuing weak data in the weeks and months ahead, we think markets may be completing the first wave of risk liquidations and that we are due for a correction higher in risky assets. Price action over the last two days has been quite resilient (initially down in risk, followed by a rebound) in the face of seemingly ever-worsening news, supporting the view that the current risk sell-off may be basing out. AUD/JPY is among the most highly correlated currency pairs to stocks and other risk assets, and it has made a potential short-term double bottom on recent lows at 73.50/60, which is also key daily trend line support and the base of a broad sideways consolidation triangle since late May. Buying AUD/JPY on current weakness anticipates a rebound to upper end of the recent range in the 77.00/79.00 area, where we would look to take profit and ultimately establish shorts for the next round of risk sell-off.
Readers should note that buying AUD/JPY on remaining weakness is a counter-trend trade and stops will need to be diligently followed. The strategy is to buy half of a long AUD/JPY position at current market levels of 74.80 and to buy the second half at 73.90 for an average long rate of 74.35. The stop will be kept tight at just below recent lows for this decline at 73.30 for a total risk of just over 100 pips. The take profit will be for 50% at 77.00 (just below 21/55 day sma) and for the remaining 50% at 78.50 for an average t/p rate of 77.75. If we see the rebound, we'll update with a potential short strategy from the upper end of the range.
Thursday, September 16, 2010
Short EURUSD With More To Go Here...
EURUSD broke out from the B-wave triangle I illustrated yesterday and has tested the first of two Fibonacci resistance zones. It's interesting that for so many recent sessions the Euro has significantly lagged the other major 6 currencies in terms of strength against the dollar. Check the inset quote sheet of my USD/XXX group. Today the Euro is the only currency that is actually stronger against the USD (USDJPY is flat). The start of a new Euro-zone recovery? I doubt it. I believe this price action is a gift-wrapped opportunity to sell into one-off Euro showing of strength while the USD is recovering against the other 6 majors. Watching key support in the USDX at 80.80, with invalidation below 80.08. I am short 2 units of EURUSD at 1.3110 with offers for 2 more units at 1.3175, and stops for all 4 units at 1.3215.
AUDJPY Stopped In Spectacular Fashion With BOJ Intervention - Focusing On Higher Dollar In The Face QE2
Well if we're going down, we might as well go down in style. Our short AUDJPY position was beginning to work at last night's Tokyo opening. But then at around 8 PM EST USDJPY exploded higher bringing AUDJPY, and the rest of the Yen crosses, higher in a historic BOJ intervention. For the first time since 2004 the Bank of Japan in a unilateral effort aggressively sold Yen, bought Dollars to stem the Yen's aggressive appreciation. There are several possible explanations of the cause and timing of the central bank's aggressive move. First, the election of Prime Minister Kan as the DPJ leader some 3 months ago was based on the platform that currency market intervention was not on the agenda, contrary to his predecessor Ichiro Ozawa who supported intervention to support growth. Much to the market's suprise, he is quickly conforming to the status quo of currency management. Second, is the outlook for QE2 from the Fed and the impact on US/JGB yield spreads. The fact that US bond yields have been so weak as longer-term US treasuries are bid up ahead of the expected announcement of QE2 reducing the US yield spread advantage. As US yields fall relative to their Japanese counterparts, there is less incentive for Japanese to sell yen to buy dollars - this will only further pressure the USDJPY exchange rate.
Talking specifically about the US 10 yr yield as it relates to the timing of the BOJ to intervene, I can't help but think the US 10 yr's inability to rally above that 2.8% resistance level we have been focusing on, as well as the subsequent sell-off, had something to do with the timing. Is there more behind it? Probably, but I am not going to sit around long USDJPY waiting for the BOJ to intervene while the S&P remains below our key 1130 triangle resistance, as the US 10 yr yield rally looks convincingly corrective in nature.
So we were stopped out of AUDJPY to put us slightly in the negative half way through the month. I look forward to battling back into the black. To do so I will continue to focus on the Euro and Dollar story, which will continue to lag both the risk-on trade as well as the pure weak USD story on the outlook of QE2. EURUSD should find support at around 1.2950 with upside targets of 1.3100 and 1.3175. I fully expect this to form a very tradable high for a resumption of the dollar bull trend. How can you still be bullish dollar with an extra 1 trillion in liquidity in the pipeline, you ask? I would like to pose an open-ended question to you. The first edition of quantitative easing was accompanied by escalated fears of inflation and a severally devalued currency. The actual result was exactly the opposite of expectations as disinflationary, and soon to be deflationary forces, strengthened the US currency. With default of some periphery Euro zone countries one failed bond auction away, German data slowing, and the commodity currencies of the world lacking the liquidity required to assume the reserve status, what makes you think this time will be any different?
Talking specifically about the US 10 yr yield as it relates to the timing of the BOJ to intervene, I can't help but think the US 10 yr's inability to rally above that 2.8% resistance level we have been focusing on, as well as the subsequent sell-off, had something to do with the timing. Is there more behind it? Probably, but I am not going to sit around long USDJPY waiting for the BOJ to intervene while the S&P remains below our key 1130 triangle resistance, as the US 10 yr yield rally looks convincingly corrective in nature.
So we were stopped out of AUDJPY to put us slightly in the negative half way through the month. I look forward to battling back into the black. To do so I will continue to focus on the Euro and Dollar story, which will continue to lag both the risk-on trade as well as the pure weak USD story on the outlook of QE2. EURUSD should find support at around 1.2950 with upside targets of 1.3100 and 1.3175. I fully expect this to form a very tradable high for a resumption of the dollar bull trend. How can you still be bullish dollar with an extra 1 trillion in liquidity in the pipeline, you ask? I would like to pose an open-ended question to you. The first edition of quantitative easing was accompanied by escalated fears of inflation and a severally devalued currency. The actual result was exactly the opposite of expectations as disinflationary, and soon to be deflationary forces, strengthened the US currency. With default of some periphery Euro zone countries one failed bond auction away, German data slowing, and the commodity currencies of the world lacking the liquidity required to assume the reserve status, what makes you think this time will be any different?
Tuesday, September 14, 2010
Weekly strategy: Buying AUD/JPY for a Risk Rebound
Risky assets (stocks, commodities, JPY-crosses) have been under intense pressure over the last few weeks as incoming data and news continue to highlight a deteriorating outlook for the global recovery. While we expect continuing weak data in the weeks and months ahead, we think markets may be completing the first wave of risk liquidations and that we are due for a correction higher in risky assets. Price action over the last two days has been quite resilient (initially down in risk, followed by a rebound) in the face of seemingly ever-worsening news, supporting the view that the current risk sell-off may be basing out. AUD/JPY is among the most highly correlated currency pairs to stocks and other risk assets, and it has made a potential short-term double bottom on recent lows at 73.50/60, which is also key daily trend line support and the base of a broad sideways consolidation triangle since late May. Buying AUD/JPY on current weakness anticipates a rebound to upper end of the recent range in the 77.00/79.00 area, where we would look to take profit and ultimately establish shorts for the next round of risk sell-off.
Readers should note that buying AUD/JPY on remaining weakness is a counter-trend trade and stops will need to be diligently followed. The strategy is to buy half of a long AUD/JPY position at current market levels of 74.80 and to buy the second half at 73.90 for an average long rate of 74.35. The stop will be kept tight at just below recent lows for this decline at 73.30 for a total risk of just over 100 pips. The take profit will be for 50% at 77.00 (just below 21/55 day sma) and for the remaining 50% at 78.50 for an average t/p rate of 77.75. If we see the rebound, we'll update with a potential short strategy from the upper end of the range.
Readers should note that buying AUD/JPY on remaining weakness is a counter-trend trade and stops will need to be diligently followed. The strategy is to buy half of a long AUD/JPY position at current market levels of 74.80 and to buy the second half at 73.90 for an average long rate of 74.35. The stop will be kept tight at just below recent lows for this decline at 73.30 for a total risk of just over 100 pips. The take profit will be for 50% at 77.00 (just below 21/55 day sma) and for the remaining 50% at 78.50 for an average t/p rate of 77.75. If we see the rebound, we'll update with a potential short strategy from the upper end of the range.
Weekly overview
Consolidation may give way to risk aversion
The past week started off on rocky footing with renewed concerns over the stability of the European financial sector sending EUR and most risk assets lower. As has become the pattern of late, relatively stable data subsequently saw most major pairs move into consolidation ranges. The week's relatively restrained price action was also likely due to various global holidays reducing overall interest. But we would note that most FX risk assets, EUR/USD and JPY-crosses in particular, remain toward the lower end of recent ranges and this predisposes us to continue to focus on the risks of a further relapse in risk appetite. Elevated European bond spreads and CDS (more below) highlight simmering fears and also suggest near-term risks are to the downside. In the bigger picture, negative data surprises seem likely to continue to outpace positive news in the weeks ahead, and we remain inclined to sell risk assets on rebounds. But the news flow has been uneven and this keeps us mindful of the current range conditions and the need to take/protect profits when opportunities permit. A continued short-term focus seems the most appropriate style for the weeks ahead, but we will give short-risk positions some more slack (let them run) if recent range lows are eventually broken. September frequently sees positions entered into for the duration of the year and given pervasive economic sluggishness and pessimism, staying short-risk seems the path of least resistance.
BIS capital reforms may hit Euro-area banks
This weekend, 27 central bank delegations will gather in Basel to iron out most of the final details of reforms to bank capital adequacy regulations. The issues boil down to how much additional capital will be required and over what time frame those capital increases will be mandated. Germany is leading the charge for lower capital increases and a longer implementation period (10 years starting from 2013), while the US is arguing for higher capital and liquidity requirements to be imposed more quickly (5 years from 2013). Germany is opposed to more stringent requirements because it fears its banking sector will be unfairly hurt by needing to raise larger amounts of capital, potentially inhibiting traditional lending activities and undermining the economic recovery there. European banks in general are less well capitalized than their American counterparts, so a shorter timeframe to raise capital will likely see some EUR-negative impact. Given the relatively long timeframes involved (either 7 or 12 years from now to meet new capital requirements), the short-term market impact may be only marginal. But given the heightened concerns over the European banking sector already in evidence, additional burdens may be a catalyst to a more extreme spasm of risk aversion. Some compromise seems likely, but it may only be in the so-called capital buffers or otherwise relatively marginal, so we will pay close attention to the final outcome.
Eurozone debt concerns resurface
This past week saw a continued widening of Eurozone peripheral bond spreads relative to Germany. The spreads have been widening since the end of July, however recent news helped to push some of the spreads to record levels. A report on Tuesday showed that the European stress tests results released by the Committee of European Banking Supervisors (CEBS) may have understated some holdings of sovereign debt. Tuesday saw the 10-year yield differentials between Portugal and Germany rise to record levels around 354 basis points and the differential between Ireland and Germany 10-year yields climb to around 372 basis points – also record highs. This highlights the ongoing sovereign debt concerns in the Eurozone which has weighed on the common currency and risk sentiment. The spreads between Greece 10-year yields and their German equivalents also advanced to levels which have not been seen since the height of the sovereign debt crisis back in May. This highlights that structural issues of the peripheral countries remain present.
At the same time yield spreads are widening between the core and periphery nations, sovereign debt credit default swaps (CDS), which are a measure of the risk of default, are reaching elevated levels for the peripheral-EU. Tuesday saw Ireland’s 5-year CDS reach record highs of roughly 382bps. It is also of note that Greece, Portugal, and Spain 5-year CDS have all increased this past week. The heightened CDS are not a factor of new sovereign issues but rather a reminder that fears continue to lurk under the surface.
The elevated yield differentials and CDS should keep the euro under pressure in the week ahead. EUR/USD has consolidated over the past few days, confined to a tight range that is supported by its 100-day sma and capped by resistance in its 21-day sma. While the bias is to the downside we would note the risks to the upside as a potential bull flag consolidation pattern is also evident. Key support levels are the 100-day sma and 23.6% retracement level of the move from the November 2009 highs to June 2010 lows which converge around 1.2650. Below here is likely to see to the 1.2400-1.2430 area which is the bull flag support and 61.8% retracement of the rally from June lows. The 21-day sma and Kijun line come in around 1.2750-80 to provide immediate resistance for EUR/USD. Above here may see to bull flag resistance around 1.2850 and then to the daily Ichimoku cloud top around 1.3030.
Democratic Party of Japan’s Election and the JPY
Naoto Kan will be faced by Ichiro Ozawa on September 14th in the DPJ presidential election. Since the Democratic Party currently controls the government in Japan, the Prime Minister title is also on the line. Just a few weeks ago Kan led dramatically in the polls, however recent polling suggest Ozawa is right on his tail. Of the 411 DPJ Diet members, Ozawa has backing from 171 while Kan has support from 168; however they only make up roughly two-thirds of the vote. The remaining votes come from local assembly members, rank and file party members and registered DPJ supporters, where it’s believed Kan will receive 60 to 70 percent of the vote. Therefore, the remaining 72 undecided DPJ diet members have come into focus and likely will determine the outcome in the election. While it is unlikely either member’s election will have a dramatic effect on the Yen, it should be noted that Ozawa has been far more vocal in stating the need for intervention and greater economic simulative measures.
Additionally, the strength of the JPY has recently driven some of Japan’s largest exporters, like Toyota and Nissan, into further investments in production facilities offshore in order to protect their profits. This will likely garner attention from the MOF and create additional pressure on the BOJ/MOF to react more aggressively to address the appreciating yen. At this stage it appears only unilateral intervention is on the table to halt the yen’s strength. If this is the case, it’s hard to see how it will accomplish anything more than give Japanese exporters and large international investors, like China, another opportunity to aggressively purchase the Yen at better levels. Any way you want to slice it, excluding some form of coordinated intervention between the BOJ, FED, ECB, etc., the path of least resistance for JPY pairs remains to the downside over the coming weeks; USD/JPY to continue to fresh 15-year lows below 83.30/35, EUR/JPY to the test 8-year low near 105.45 and GBP/JPY to try the May 2010 lows around 126.75/80.
Key data and events to watch next week
The economic data for the U.S. kicks off the week on Monday with the monthly budget statement for August. Set for release on Tuesday is August retails sales, September IBD/TIPP economic optimism, and business inventories figures for July. Wednesday sees August import price index, September Empire Manufacturing, as well and industrial production and capacity utilization for the month of August. On deck for Thursday is August PPI numbers, weekly jobless claims, 2Q current account balance, TIC Flows data for July and the September Philadelphia Fed Index. Friday rounds out the week with August CPI numbers and the preliminary University of Michigan Confidence survey results for September.
The Eurozone starts the action off on Monday with the release of France’s July current account. Tuesday sees French August CPI numbers, German wholesale prices for August, Germany’s ZEW surveys results for September are released, and Bundesbank President Axel Weber will speak in Berlin. Also due out on Tuesday is Eurozone 2Q labor costs, EZ July industrial production and the September EZ ZEW survey. On deck for Wednesday are EZ August CPI and 2Q employment numbers and speeches by the EU’s Olli Rehn and the ECB’s Lorenzo Bini Smaghi. Set for release on Thursday is EZ trade balance and Friday finishes the week up with German producer prices for August as well as EZ current account and construction output for July.
The UK data stream begins with Monday’s RICS house price balance and Nationwide consumer confidence for August. Tuesday sees CPI and RPI figures for August, DCLG UK house prices for July, and the BOE’s Martin Weale (dovish) will testify to lawmakers in London. Due out on Wednesday is August jobless claims, weekly earnings and ILO unemployment data for July and BOE Governor Mervyn King will speak in Manchester. Thursday wraps up the week with August retail sales and a speech by the BOE’s Adam Posen.
Japan kicks off on Tuesday with July final industrial production and capacity utilization. BOJ Deputy Governor Nishimura will speak in Tokyo on Wednesday and the Tertiary Industry index for July and weekly foreign securities investments are due out on Thursday. Also on Thursday, the BOJ Governor Masaaki Shirakawa is scheduled to speak in Tokyo.
Canada’s calendar is light with July new motor vehicle sales, 2Q labor productivity and capacity utilization rate set for release on Tuesday. Bank of Canada Governor Mark Carney is scheduled to give a lecture in Germany on Tuesday and Wednesday wraps up the week with a speech by BOC Deputy Governor Tim Lane and July manufacturing sales.
The data down under starts with New Zealand’s REINZ housing price index on Monday , followed by house sales for August, NZ July retail sales, and August NZ card spending on Tuesday. Australia's August NAB business confidence and conditions is also set for release on Tuesday. Wednesday sees Australia’s August Westpac consumer confidence index for September and 2Q dwelling starts. On deck for Thursday is August business NZ PMI the RBNZ rate announcement. Thursday’s data also includes Australian consumer inflation expectation for September and a speech by RBA Assistant Governor Philip Lowe to finish things up for the week.
Be on the lookout for important China data as well. Sometime between Saturday and Wednesday August new yuan loans will be released. August Actual FDI will be released between Tuesday and Thursday. The Conference Board China July leading economic index is set for release on Tuesday.
The past week started off on rocky footing with renewed concerns over the stability of the European financial sector sending EUR and most risk assets lower. As has become the pattern of late, relatively stable data subsequently saw most major pairs move into consolidation ranges. The week's relatively restrained price action was also likely due to various global holidays reducing overall interest. But we would note that most FX risk assets, EUR/USD and JPY-crosses in particular, remain toward the lower end of recent ranges and this predisposes us to continue to focus on the risks of a further relapse in risk appetite. Elevated European bond spreads and CDS (more below) highlight simmering fears and also suggest near-term risks are to the downside. In the bigger picture, negative data surprises seem likely to continue to outpace positive news in the weeks ahead, and we remain inclined to sell risk assets on rebounds. But the news flow has been uneven and this keeps us mindful of the current range conditions and the need to take/protect profits when opportunities permit. A continued short-term focus seems the most appropriate style for the weeks ahead, but we will give short-risk positions some more slack (let them run) if recent range lows are eventually broken. September frequently sees positions entered into for the duration of the year and given pervasive economic sluggishness and pessimism, staying short-risk seems the path of least resistance.
BIS capital reforms may hit Euro-area banks
This weekend, 27 central bank delegations will gather in Basel to iron out most of the final details of reforms to bank capital adequacy regulations. The issues boil down to how much additional capital will be required and over what time frame those capital increases will be mandated. Germany is leading the charge for lower capital increases and a longer implementation period (10 years starting from 2013), while the US is arguing for higher capital and liquidity requirements to be imposed more quickly (5 years from 2013). Germany is opposed to more stringent requirements because it fears its banking sector will be unfairly hurt by needing to raise larger amounts of capital, potentially inhibiting traditional lending activities and undermining the economic recovery there. European banks in general are less well capitalized than their American counterparts, so a shorter timeframe to raise capital will likely see some EUR-negative impact. Given the relatively long timeframes involved (either 7 or 12 years from now to meet new capital requirements), the short-term market impact may be only marginal. But given the heightened concerns over the European banking sector already in evidence, additional burdens may be a catalyst to a more extreme spasm of risk aversion. Some compromise seems likely, but it may only be in the so-called capital buffers or otherwise relatively marginal, so we will pay close attention to the final outcome.
Eurozone debt concerns resurface
This past week saw a continued widening of Eurozone peripheral bond spreads relative to Germany. The spreads have been widening since the end of July, however recent news helped to push some of the spreads to record levels. A report on Tuesday showed that the European stress tests results released by the Committee of European Banking Supervisors (CEBS) may have understated some holdings of sovereign debt. Tuesday saw the 10-year yield differentials between Portugal and Germany rise to record levels around 354 basis points and the differential between Ireland and Germany 10-year yields climb to around 372 basis points – also record highs. This highlights the ongoing sovereign debt concerns in the Eurozone which has weighed on the common currency and risk sentiment. The spreads between Greece 10-year yields and their German equivalents also advanced to levels which have not been seen since the height of the sovereign debt crisis back in May. This highlights that structural issues of the peripheral countries remain present.
At the same time yield spreads are widening between the core and periphery nations, sovereign debt credit default swaps (CDS), which are a measure of the risk of default, are reaching elevated levels for the peripheral-EU. Tuesday saw Ireland’s 5-year CDS reach record highs of roughly 382bps. It is also of note that Greece, Portugal, and Spain 5-year CDS have all increased this past week. The heightened CDS are not a factor of new sovereign issues but rather a reminder that fears continue to lurk under the surface.
The elevated yield differentials and CDS should keep the euro under pressure in the week ahead. EUR/USD has consolidated over the past few days, confined to a tight range that is supported by its 100-day sma and capped by resistance in its 21-day sma. While the bias is to the downside we would note the risks to the upside as a potential bull flag consolidation pattern is also evident. Key support levels are the 100-day sma and 23.6% retracement level of the move from the November 2009 highs to June 2010 lows which converge around 1.2650. Below here is likely to see to the 1.2400-1.2430 area which is the bull flag support and 61.8% retracement of the rally from June lows. The 21-day sma and Kijun line come in around 1.2750-80 to provide immediate resistance for EUR/USD. Above here may see to bull flag resistance around 1.2850 and then to the daily Ichimoku cloud top around 1.3030.
Democratic Party of Japan’s Election and the JPY
Naoto Kan will be faced by Ichiro Ozawa on September 14th in the DPJ presidential election. Since the Democratic Party currently controls the government in Japan, the Prime Minister title is also on the line. Just a few weeks ago Kan led dramatically in the polls, however recent polling suggest Ozawa is right on his tail. Of the 411 DPJ Diet members, Ozawa has backing from 171 while Kan has support from 168; however they only make up roughly two-thirds of the vote. The remaining votes come from local assembly members, rank and file party members and registered DPJ supporters, where it’s believed Kan will receive 60 to 70 percent of the vote. Therefore, the remaining 72 undecided DPJ diet members have come into focus and likely will determine the outcome in the election. While it is unlikely either member’s election will have a dramatic effect on the Yen, it should be noted that Ozawa has been far more vocal in stating the need for intervention and greater economic simulative measures.
Additionally, the strength of the JPY has recently driven some of Japan’s largest exporters, like Toyota and Nissan, into further investments in production facilities offshore in order to protect their profits. This will likely garner attention from the MOF and create additional pressure on the BOJ/MOF to react more aggressively to address the appreciating yen. At this stage it appears only unilateral intervention is on the table to halt the yen’s strength. If this is the case, it’s hard to see how it will accomplish anything more than give Japanese exporters and large international investors, like China, another opportunity to aggressively purchase the Yen at better levels. Any way you want to slice it, excluding some form of coordinated intervention between the BOJ, FED, ECB, etc., the path of least resistance for JPY pairs remains to the downside over the coming weeks; USD/JPY to continue to fresh 15-year lows below 83.30/35, EUR/JPY to the test 8-year low near 105.45 and GBP/JPY to try the May 2010 lows around 126.75/80.
Key data and events to watch next week
The economic data for the U.S. kicks off the week on Monday with the monthly budget statement for August. Set for release on Tuesday is August retails sales, September IBD/TIPP economic optimism, and business inventories figures for July. Wednesday sees August import price index, September Empire Manufacturing, as well and industrial production and capacity utilization for the month of August. On deck for Thursday is August PPI numbers, weekly jobless claims, 2Q current account balance, TIC Flows data for July and the September Philadelphia Fed Index. Friday rounds out the week with August CPI numbers and the preliminary University of Michigan Confidence survey results for September.
The Eurozone starts the action off on Monday with the release of France’s July current account. Tuesday sees French August CPI numbers, German wholesale prices for August, Germany’s ZEW surveys results for September are released, and Bundesbank President Axel Weber will speak in Berlin. Also due out on Tuesday is Eurozone 2Q labor costs, EZ July industrial production and the September EZ ZEW survey. On deck for Wednesday are EZ August CPI and 2Q employment numbers and speeches by the EU’s Olli Rehn and the ECB’s Lorenzo Bini Smaghi. Set for release on Thursday is EZ trade balance and Friday finishes the week up with German producer prices for August as well as EZ current account and construction output for July.
The UK data stream begins with Monday’s RICS house price balance and Nationwide consumer confidence for August. Tuesday sees CPI and RPI figures for August, DCLG UK house prices for July, and the BOE’s Martin Weale (dovish) will testify to lawmakers in London. Due out on Wednesday is August jobless claims, weekly earnings and ILO unemployment data for July and BOE Governor Mervyn King will speak in Manchester. Thursday wraps up the week with August retail sales and a speech by the BOE’s Adam Posen.
Japan kicks off on Tuesday with July final industrial production and capacity utilization. BOJ Deputy Governor Nishimura will speak in Tokyo on Wednesday and the Tertiary Industry index for July and weekly foreign securities investments are due out on Thursday. Also on Thursday, the BOJ Governor Masaaki Shirakawa is scheduled to speak in Tokyo.
Canada’s calendar is light with July new motor vehicle sales, 2Q labor productivity and capacity utilization rate set for release on Tuesday. Bank of Canada Governor Mark Carney is scheduled to give a lecture in Germany on Tuesday and Wednesday wraps up the week with a speech by BOC Deputy Governor Tim Lane and July manufacturing sales.
The data down under starts with New Zealand’s REINZ housing price index on Monday , followed by house sales for August, NZ July retail sales, and August NZ card spending on Tuesday. Australia's August NAB business confidence and conditions is also set for release on Tuesday. Wednesday sees Australia’s August Westpac consumer confidence index for September and 2Q dwelling starts. On deck for Thursday is August business NZ PMI the RBNZ rate announcement. Thursday’s data also includes Australian consumer inflation expectation for September and a speech by RBA Assistant Governor Philip Lowe to finish things up for the week.
Be on the lookout for important China data as well. Sometime between Saturday and Wednesday August new yuan loans will be released. August Actual FDI will be released between Tuesday and Thursday. The Conference Board China July leading economic index is set for release on Tuesday.
Friday, September 10, 2010
SELLING EURUSD AFTER 70 OFFERS MISS* S&P Fails At 1110
I booked half profits in EURUSD on a surprising show of S&P and US 10 Yr yield strength. At the NY equity close the gains were quickly reversed, so perhaps I was a bit quick to exit with partial profits. I am still short 1 unit with a stop entry at 1.2650 for another unit.
Thursday, September 9, 2010
SELLING EURUSD AFTER 70 OFFERS MISS* S&P Fails At 1110
After repeated attempts to trigger our 1.2770 offers and the subsequent failure by a few pips, I went ahead and sold 2 units of EURUSD at 1.2743. Strong economic data this morning including trade balance and weekly jobless claims sparked the risk on rally. An important foot note on the jobless claims. Caution should be taken before reading too much into these numbers as 9 states did not report, thus their results were estimated and figured into the report. Also, this is a shortened holiday week so I am more than willing to fade this economic data with a long USD position.
Following the pre-equity open economic data the S&P cash index opened at around 1107 and immediately traded into our focus 1110 resistance level. The 10 year bond yield featured yesterday remained below the top of a possible C-wave correction at 2.768% following the data as the S&P poked above the equivalent high, directly into that key 1110 level.
EURUSD has likely completed the 3rd leg of a corrective flat pattern, which subdivides into a 3-3-5 structure. The final 5-wave effort in wave Y is likely complete, and if not will likely do so at slightly higher prices, but still below 1.2800. I am short 2 units at 1.2743 with stops at 1.2865 for now. My short position is highly contingent on the S&P cash staying below the 1110-1115 level. If the S&P gets too far above that level, I will most likely cut the EURUSD position and not allow the 1.2865 stops to trigger. On the downside I am more the willing to add to the position on any S&P weakness to exploit EURUSD's relative weakness. I am a stop entry seller for 1 unit at 1.2650 with a 1.2730 stop loss on that entry and a 1.2500 take profit. If that stop entry is triggered, I will also trail the stop loss on my existing short position down to 1.2730 to lock in profits.
Following the pre-equity open economic data the S&P cash index opened at around 1107 and immediately traded into our focus 1110 resistance level. The 10 year bond yield featured yesterday remained below the top of a possible C-wave correction at 2.768% following the data as the S&P poked above the equivalent high, directly into that key 1110 level.
EURUSD has likely completed the 3rd leg of a corrective flat pattern, which subdivides into a 3-3-5 structure. The final 5-wave effort in wave Y is likely complete, and if not will likely do so at slightly higher prices, but still below 1.2800. I am short 2 units at 1.2743 with stops at 1.2865 for now. My short position is highly contingent on the S&P cash staying below the 1110-1115 level. If the S&P gets too far above that level, I will most likely cut the EURUSD position and not allow the 1.2865 stops to trigger. On the downside I am more the willing to add to the position on any S&P weakness to exploit EURUSD's relative weakness. I am a stop entry seller for 1 unit at 1.2650 with a 1.2730 stop loss on that entry and a 1.2500 take profit. If that stop entry is triggered, I will also trail the stop loss on my existing short position down to 1.2730 to lock in profits.
Wednesday, September 8, 2010
Portuguese, Irish Yield Spreads Narrow Sparking EURUSD Corrective W.2 Rally – Selling Here…
Yields on the Portuguese and Irish bonds relative to the benchmark German bonds narrowed from record highs of 372 bps and 377 bps, to 350 and 372 bps respectively, offering a short term reprieve in fear of default. EURUSD is rallying in response to slightly better than expected bond auctions, but restructuring appears to be in near future and the corrective wave structure in the hourly EURUSD confirms this outlook. A look at the S&P futures and EURUSD overlay supports this outlook as EURUSD is significantly lagging equity advances. I have significant resistance in the SP 500 60 Min Cashat 1110.
Bringing the yield focus back to the US, the advance from the 2.4% low in the 10 yr maturity is also taking the distinctive shape of a 3-wave corrective structure. Yields failed at the 2.72%-area Fib resistance zone, and have since backed off. While yields remain below this level, the demand for the safety of US treasuries should continue, which supports the USD rally.
As mentioned above, EURUSD is rallying in 3 corrective waves facing resistance at the 1.2770 level. I have adjusted the offers in EURUSD to 1.2770 and 1.2805 with stops at 1.2905 from yesterday's trade parameters. True the stops are wide, but know that it's unlikely I allow the market to go that far against us before cutting the potion. They are in place strictly to mitigate risk in the event of a complete market eruption, and will be quickly adjusted lower as the trade progresses
Bringing the yield focus back to the US, the advance from the 2.4% low in the 10 yr maturity is also taking the distinctive shape of a 3-wave corrective structure. Yields failed at the 2.72%-area Fib resistance zone, and have since backed off. While yields remain below this level, the demand for the safety of US treasuries should continue, which supports the USD rally.
As mentioned above, EURUSD is rallying in 3 corrective waves facing resistance at the 1.2770 level. I have adjusted the offers in EURUSD to 1.2770 and 1.2805 with stops at 1.2905 from yesterday's trade parameters. True the stops are wide, but know that it's unlikely I allow the market to go that far against us before cutting the potion. They are in place strictly to mitigate risk in the event of a complete market eruption, and will be quickly adjusted lower as the trade progresses
Tuesday, September 7, 2010
EURUSD SHORT CLOSED, +115 Pips, Re-Selling Here. Intermarket Analysis at work…
I left the orders to sell EURUSD in place over the weekend despite a risk positive and fairly eventful Non-Farm Payrolls on Friday. The first offer at 1.2900 was triggered on the Sydney Open last night and dollar strength quickly emerged to begin the new month. The intermarket analysis exercise of pair selection via relative strength I showed you last week was perfectly illustrated in this trade. EURUSD is clearly the weakest risk trade of the 3 I showed you on the daily time frame. On Friday it was acting extremely sluggish as the relatively stronger AUDUSD was powering ahead. Then, today's outsized down move in EURUSD on the first sign of a risk trade rollover perfectly accents this concept. As I type, EURUSD is lower by 0.86% on the session as AUDUSD is trading -0.35%.
I issued the take profit on Twitter at 1.2785 to capture 115 pips on the single unit to begin September. I am now re-offering with larger size at 1.2805 and 1.2845 with stops at 1.2905 for now.
I issued the take profit on Twitter at 1.2785 to capture 115 pips on the single unit to begin September. I am now re-offering with larger size at 1.2805 and 1.2845 with stops at 1.2905 for now.
Weekly Overview
Risk rebounds on improving global data
The past week began with disappointment stemming from Japan’s lack of direct currency intervention and risk aversion looked probable to continue into the week. This was not the case as better than expected Australian 2Q GDP started a ripple effect culminating into a global wave of positive data surprises. Upbeat manufacturing numbers midweek out of China and the US saw safe havens soften and sent US equities soaring higher by greater than 2% Wednesday. The positive data stream continued Thursday as US July Pending Home Sales printed a much better than consensus +5.2% as compared to an expected -1% decline. Friday’s much anticipated NFP capped the data session as Private Payrolls jumped by +67k and the headline number declined by a less than expected -54k versus expectations of a -105k drop, seemingly cementing a renewed emergence of risk appetite.
The most recent risk rally faces a number of hurdles in the week ahead
Negative sentiment looks to have reversed with the prior week’s data releases but this most recent risk rally faces a number of hurdles in coming weeks. September has historically been an underperforming month for US equities and with the S&P facing critical resistance into its 100-day sma, currently 1105/10, along with a major horizontal pivot zone into 1130/35 may see near-term upside capped into these levels. Until these key price zones are breached, the current rally cannot be viewed as anything more than a correction towards range-bound conditions. Furthermore, much of the large moves realized this past week have occurred on extremely thin liquidity representing the opinions of a smaller percentage of market participants. Normal liquidity conditions should return next week. Price action in correlated markets also seems to confirm further circumspection into the current market euphoria. Gold, the alternative currency and a constant in the ‘safe haven’ asset class continues to trade at elevated levels into $1250/ oz. This may be a result of the softer dollar but the yellow metal’s divergence with risk suggests further downside could be in store. Elevated levels are a theme shared by European debt spreads as well. Although Friday has seen core-periphery spreads tighten, mainly as a result of a shot higher in German bond yields, they remain near May pre-crisis response levels and indicates continued concerns about the peripheral Eurozone(Ireland, Greece, Portugal) are highly probable.
A Multitude of Interest Rate Announcements in the Week Ahead
The week ahead sees a number of interest rate statements beginning down under with the RBA policy rate decision on Tuesday. The Reserve Bank is likely to remain on hold but accelerating growth evidenced by the stronger 2Q GDP suggests tightening for the following November meeting is an increasing possibility. The BOJ interest rate decision, also scheduled for release Tuesday, is likely to be a non-event as the target rate will remain steady at 0.10%. The focus in Japan remains to be on continued intervention speculation and the political uncertainty surrounding the September elections. Wednesday sees the Bank of Canada rate decision and the market consensus for a 25 bp rate hike to 1% seems less of a likelihood considering the worse-than-expected 2Q GDP print of 2%. The risk is for a higher USDCAD as the market seems divided with a slight edge for a 25bp rate hike. The increasing uncertainty surrounding the decision may see the Canadian dollar weaken considerably if no tightening measures are taken. The heavy week of interest rate announcements winds down Thursday as the Bank of England is expected to keep the target rate steady at 0.50%. This is likely to be a non-event, the BOE’s policy is to withhold any post-decision press conferences unless there is a change in the target rate, and the focus will most likely be on the bevy of data scheduled for release next week.
Outcome from emergency BOJ meeting & political uncertainty may impact the JPY
Over the last few weeks BOJ Governor Shirakawa has been faced with mounting pressure from Prime Minister Kan to address the strengthening Japanese yen and deflation. In response, on Monday the BOJ held an emergency meeting and boosted their bank lending facility by 10 trillion to 30 trillion yen. While it was encouraging to see the BOJ take action, their response was viewed by many as being too little, too late and disappointed market participants. Many officials wanted the BOJ to engage in large-scale monetary easing; however Shirakawa is currently averse to increasing their purchases of government bonds outright from 1.8 trillion yen or lowering the policy rate from 0.1%.
Meanwhile, a more troubling topic at the moment for the JPY is the announcement of Ichiro Ozawa's candidacy for the DPJ Party Election on September 14th. The latest public opinion polls suggest the current Prime Minister, Naoto Kan, is currently leading by over 4:1; however Ozawa heads the largest faction in the DPJ and has been far more vocal in stating the need for intervention to prevent a stronger JPY. The risk here is that everyone will be so caught up in the election that they won’t be able to further address to Yen or their faltering economy. Additionally, many government officials in Japan feel that without U.S. support, unilateral intervention to halt the appreciating yen could ultimately be unsuccessful. In this scenario, it’s probable to see another test of the 15-year low in USD/JPY around 83.60 and the 8-year low in EUR/JPY near 105.45 over the coming weeks.
Key data and events to watch next week
The U.S. starts its week of economic data on Wednesday with the Fed’s Beige Book and July consumer credit. Thursday is set to release July Trade balance and the usual jobless claims. Friday wraps up the week with July wholesale inventories.
The Eurozone kicks off on Monday with September Sentix Investor confidence and the ECB’s Jurgen Stark will speak in Berlin. Tuesdays sees Swiss unemployment for August, German July factory orders, and speeches from the ECB’s Jurgen Stark and Lorenzo Bini Smaghi. Set for release on Wednesday is German and French July trade balance figures as well as Germany’s July industrial production. On Thursday, France sees its 2Q final non-farm payrolls and Germany is set to release August final CPI numbers. Friday rounds out the data with French July manufacturing and industrial production numbers.
The U.K. starts the action off the August Hailfax house price index, BRC August retail sales monitor, and new car registrations. Wednesday sees July industrial and manufacturing productions numbers and the August NIESR GDP estimate. The Bank of England will announce interest rates and its asset purchase target as well as release trade balance numbers for July on Thursday. Friday finishes things up with August PPI input and output readings.
Japan releases its August official reserve assets numbers and kicks of the BOJ monetary policy meeting on Monday. Tuesday sees the July preliminary leading and coincident index, August money stock, July machine orders, current account, trade balance and the BOJ will announce its target rate. Thursdays data include August bankruptcies and Eco Watchers survey results. Friday closes out the week with 2Q final GDP, August domestic CGPI and the BOJ will release its August 9-10 Board meeting minutes.
Canada kicks off on Wednesday with July building permits, August Ivey PMI and the Bank of Canada rate announcement. Set for release on Thursday is August housing starts as well as July new housing price index and international merchandise trade. Friday’s data sees the August employment report to wrap up the week.
The data down under begins on Monday with Australia’s AiG performance of construction index for August, ANZ job advertisements and TD Securities inflation numbers. On Tuesday, the RBA will announce its cash target, New Zealand is set to release 2Q manufacturing activity, and the July Australian home loans is set for release. On deck for Wednesday is New Zealand August card spending and the August Australian employment report. Thursday sees 2Q NZ Terms of Trade index and Australia foreign reserves numbers for August.
Be on the lookout for important China data as well. Monday sees 4Q China Manpower survey and trade balance numbers for August including exports and imports will be released on Friday
The past week began with disappointment stemming from Japan’s lack of direct currency intervention and risk aversion looked probable to continue into the week. This was not the case as better than expected Australian 2Q GDP started a ripple effect culminating into a global wave of positive data surprises. Upbeat manufacturing numbers midweek out of China and the US saw safe havens soften and sent US equities soaring higher by greater than 2% Wednesday. The positive data stream continued Thursday as US July Pending Home Sales printed a much better than consensus +5.2% as compared to an expected -1% decline. Friday’s much anticipated NFP capped the data session as Private Payrolls jumped by +67k and the headline number declined by a less than expected -54k versus expectations of a -105k drop, seemingly cementing a renewed emergence of risk appetite.
The most recent risk rally faces a number of hurdles in the week ahead
Negative sentiment looks to have reversed with the prior week’s data releases but this most recent risk rally faces a number of hurdles in coming weeks. September has historically been an underperforming month for US equities and with the S&P facing critical resistance into its 100-day sma, currently 1105/10, along with a major horizontal pivot zone into 1130/35 may see near-term upside capped into these levels. Until these key price zones are breached, the current rally cannot be viewed as anything more than a correction towards range-bound conditions. Furthermore, much of the large moves realized this past week have occurred on extremely thin liquidity representing the opinions of a smaller percentage of market participants. Normal liquidity conditions should return next week. Price action in correlated markets also seems to confirm further circumspection into the current market euphoria. Gold, the alternative currency and a constant in the ‘safe haven’ asset class continues to trade at elevated levels into $1250/ oz. This may be a result of the softer dollar but the yellow metal’s divergence with risk suggests further downside could be in store. Elevated levels are a theme shared by European debt spreads as well. Although Friday has seen core-periphery spreads tighten, mainly as a result of a shot higher in German bond yields, they remain near May pre-crisis response levels and indicates continued concerns about the peripheral Eurozone(Ireland, Greece, Portugal) are highly probable.
A Multitude of Interest Rate Announcements in the Week Ahead
The week ahead sees a number of interest rate statements beginning down under with the RBA policy rate decision on Tuesday. The Reserve Bank is likely to remain on hold but accelerating growth evidenced by the stronger 2Q GDP suggests tightening for the following November meeting is an increasing possibility. The BOJ interest rate decision, also scheduled for release Tuesday, is likely to be a non-event as the target rate will remain steady at 0.10%. The focus in Japan remains to be on continued intervention speculation and the political uncertainty surrounding the September elections. Wednesday sees the Bank of Canada rate decision and the market consensus for a 25 bp rate hike to 1% seems less of a likelihood considering the worse-than-expected 2Q GDP print of 2%. The risk is for a higher USDCAD as the market seems divided with a slight edge for a 25bp rate hike. The increasing uncertainty surrounding the decision may see the Canadian dollar weaken considerably if no tightening measures are taken. The heavy week of interest rate announcements winds down Thursday as the Bank of England is expected to keep the target rate steady at 0.50%. This is likely to be a non-event, the BOE’s policy is to withhold any post-decision press conferences unless there is a change in the target rate, and the focus will most likely be on the bevy of data scheduled for release next week.
Outcome from emergency BOJ meeting & political uncertainty may impact the JPY
Over the last few weeks BOJ Governor Shirakawa has been faced with mounting pressure from Prime Minister Kan to address the strengthening Japanese yen and deflation. In response, on Monday the BOJ held an emergency meeting and boosted their bank lending facility by 10 trillion to 30 trillion yen. While it was encouraging to see the BOJ take action, their response was viewed by many as being too little, too late and disappointed market participants. Many officials wanted the BOJ to engage in large-scale monetary easing; however Shirakawa is currently averse to increasing their purchases of government bonds outright from 1.8 trillion yen or lowering the policy rate from 0.1%.
Meanwhile, a more troubling topic at the moment for the JPY is the announcement of Ichiro Ozawa's candidacy for the DPJ Party Election on September 14th. The latest public opinion polls suggest the current Prime Minister, Naoto Kan, is currently leading by over 4:1; however Ozawa heads the largest faction in the DPJ and has been far more vocal in stating the need for intervention to prevent a stronger JPY. The risk here is that everyone will be so caught up in the election that they won’t be able to further address to Yen or their faltering economy. Additionally, many government officials in Japan feel that without U.S. support, unilateral intervention to halt the appreciating yen could ultimately be unsuccessful. In this scenario, it’s probable to see another test of the 15-year low in USD/JPY around 83.60 and the 8-year low in EUR/JPY near 105.45 over the coming weeks.
Key data and events to watch next week
The U.S. starts its week of economic data on Wednesday with the Fed’s Beige Book and July consumer credit. Thursday is set to release July Trade balance and the usual jobless claims. Friday wraps up the week with July wholesale inventories.
The Eurozone kicks off on Monday with September Sentix Investor confidence and the ECB’s Jurgen Stark will speak in Berlin. Tuesdays sees Swiss unemployment for August, German July factory orders, and speeches from the ECB’s Jurgen Stark and Lorenzo Bini Smaghi. Set for release on Wednesday is German and French July trade balance figures as well as Germany’s July industrial production. On Thursday, France sees its 2Q final non-farm payrolls and Germany is set to release August final CPI numbers. Friday rounds out the data with French July manufacturing and industrial production numbers.
The U.K. starts the action off the August Hailfax house price index, BRC August retail sales monitor, and new car registrations. Wednesday sees July industrial and manufacturing productions numbers and the August NIESR GDP estimate. The Bank of England will announce interest rates and its asset purchase target as well as release trade balance numbers for July on Thursday. Friday finishes things up with August PPI input and output readings.
Japan releases its August official reserve assets numbers and kicks of the BOJ monetary policy meeting on Monday. Tuesday sees the July preliminary leading and coincident index, August money stock, July machine orders, current account, trade balance and the BOJ will announce its target rate. Thursdays data include August bankruptcies and Eco Watchers survey results. Friday closes out the week with 2Q final GDP, August domestic CGPI and the BOJ will release its August 9-10 Board meeting minutes.
Canada kicks off on Wednesday with July building permits, August Ivey PMI and the Bank of Canada rate announcement. Set for release on Thursday is August housing starts as well as July new housing price index and international merchandise trade. Friday’s data sees the August employment report to wrap up the week.
The data down under begins on Monday with Australia’s AiG performance of construction index for August, ANZ job advertisements and TD Securities inflation numbers. On Tuesday, the RBA will announce its cash target, New Zealand is set to release 2Q manufacturing activity, and the July Australian home loans is set for release. On deck for Wednesday is New Zealand August card spending and the August Australian employment report. Thursday sees 2Q NZ Terms of Trade index and Australia foreign reserves numbers for August.
Be on the lookout for important China data as well. Monday sees 4Q China Manpower survey and trade balance numbers for August including exports and imports will be released on Friday
Friday, September 3, 2010
NFP , ISM Elicits Volatile Reaction In Yen, Rates – Offering AUD/JPY
The immediate reaction to NFP was higher sharply higher equity prices and lower bond prices following a beat of the consensus private sector reading by 21k. The corresponding yields on bonds moved higher relieving the short-term highly overbought nature of the Yen. The Yen is greater than 1% lower against all the majors except against the USD and CHF, the other two safe haven currencies. The commodity currencies led by Aussie and Kiwi were the second group to react to the stronger, but still mixed employment report.
US equity markets opened up by 1.08% this morning, but the reality that “we only lost 51k jobs“ last month may soon set in. My belief is that the expectations for a disaster jobs report where high and we are seeing short-covering in the interest rate and Yen markets. The reaction in the EURUSD has been extremely sluggish in terms of risk-on, which I believe is very telling of continued underlying weakness in the market psychology. The President is scheduled to speak , again, today and the markets are looking for specifics of what steps the government will take should the recovery rally begin to lose steam. Should the President disappoint on that end, risk aversion could come roaring back. Also, we have an ISM number at 10:00 AM EST today that markets will be watching.
The S&P 500 faces significant resistance from the .786 retracement at around 1110 as we currently trade 1103. I am watching a key level of resistance in the AUDJPY at 78.15-78.55 after re-working the AUDJPY wave count from yesterday. A failure of both levels will provide evidence that the short-covering efforts following a “ non-disaster “ are exhausted, and a return to the realities of our economic situation is approaching. Per the SOTD position tracker below, I have orders to sell AUDJPY at 78.15 and 78.45 with stop losses at 79.50
10:15 AM EST Following the a dismal Non-manufacturing ISM number and talk of indefinite cancelation of the president's speech, which he is now giving, AUDJPY moved sharply lower against the resistance zone. I am setting all of this noise aside, and will leave my sell orders as they are.
US equity markets opened up by 1.08% this morning, but the reality that “we only lost 51k jobs“ last month may soon set in. My belief is that the expectations for a disaster jobs report where high and we are seeing short-covering in the interest rate and Yen markets. The reaction in the EURUSD has been extremely sluggish in terms of risk-on, which I believe is very telling of continued underlying weakness in the market psychology. The President is scheduled to speak , again, today and the markets are looking for specifics of what steps the government will take should the recovery rally begin to lose steam. Should the President disappoint on that end, risk aversion could come roaring back. Also, we have an ISM number at 10:00 AM EST today that markets will be watching.
The S&P 500 faces significant resistance from the .786 retracement at around 1110 as we currently trade 1103. I am watching a key level of resistance in the AUDJPY at 78.15-78.55 after re-working the AUDJPY wave count from yesterday. A failure of both levels will provide evidence that the short-covering efforts following a “ non-disaster “ are exhausted, and a return to the realities of our economic situation is approaching. Per the SOTD position tracker below, I have orders to sell AUDJPY at 78.15 and 78.45 with stop losses at 79.50
10:15 AM EST Following the a dismal Non-manufacturing ISM number and talk of indefinite cancelation of the president's speech, which he is now giving, AUDJPY moved sharply lower against the resistance zone. I am setting all of this noise aside, and will leave my sell orders as they are.
Thursday, September 2, 2010
How To Choose The Market To Trade Using Intermarket Analysis - Selling EURUSD Into NFP...
Following a monster up-day to kickoff September, S&P futures are flat ahead of the New York equity opening. Weekly jobless claims came right at the expected 472k, with just pending home sales index at 10:00 AM EST before we face Friday's all-important US Non-Farm Payrolls Index for August. Yesterday I presented two cases for the direction of the US dollar. The more and more I study the markets this week, the more I see evidence of a path towards continued risk aversion following tomorrow's 8:30 AM EST release. As we know, risk aversion equates to a stronger dollar, lower equities, and lower interest rates in the near term.
So if we are preparing to position our self in a risk-off market position dependent on lower equities and rates, how do we know which currency pair to choose? Well regular readers know that I heavily rely on the Elliott Wave Principle to define trade entry, exit, risk, and reward parameters. Let's first take a look at the EURUSD chart. I see a simple A-B-C correction in wave 2 with 3 upside target resistance zones to initiate short trades.
I see a similar pattern on the 180 min AUDUSD chart; a A-B-C correction into purple wave .2 with resistance just above us at 0.9125.
Following a large b-wave triangle completion, AUDJPY began moving lower in the same degree c-wave with lower prices forecasted. AUDJPY has a similar looking pattern of failure at wave .2 resistance at the .786 retracement like the other two candidates. So how do we know which pair to choose?
A common method I use is an Intermarket Analysis technique of overlaying our markets in question and gauging relative strength of the various markets. The leading market is the S&P futures. This market has a high degree of control of where these other markets go. So if we choose the correct direction in the S&P, all the FX pairs shown should also react in a similar direction, but the key is they will react in varying degrees. We can see the AUDUSD has moderately outperformed the S&P futures, whereas AUDJPY has moderately underperformed the S&P futures. I think you see where I'm going with this, EURUSD has significantly underperformed the other markets. So with all else in terms of clear Elliott Wave patterns being equal, it is the prudent choice to get short the relatively weaker FX pair expecting an out-sized downside move. I am looking to lightly sell EURUSD ahead of the NFP tomorrow. Per the SOTD position tracker below, I have orders to sell 1 unit of EURUSD at 1.2900, another unit 1.2945, with stops for both at 1.3055.
So if we are preparing to position our self in a risk-off market position dependent on lower equities and rates, how do we know which currency pair to choose? Well regular readers know that I heavily rely on the Elliott Wave Principle to define trade entry, exit, risk, and reward parameters. Let's first take a look at the EURUSD chart. I see a simple A-B-C correction in wave 2 with 3 upside target resistance zones to initiate short trades.
I see a similar pattern on the 180 min AUDUSD chart; a A-B-C correction into purple wave .2 with resistance just above us at 0.9125.
Following a large b-wave triangle completion, AUDJPY began moving lower in the same degree c-wave with lower prices forecasted. AUDJPY has a similar looking pattern of failure at wave .2 resistance at the .786 retracement like the other two candidates. So how do we know which pair to choose?
A common method I use is an Intermarket Analysis technique of overlaying our markets in question and gauging relative strength of the various markets. The leading market is the S&P futures. This market has a high degree of control of where these other markets go. So if we choose the correct direction in the S&P, all the FX pairs shown should also react in a similar direction, but the key is they will react in varying degrees. We can see the AUDUSD has moderately outperformed the S&P futures, whereas AUDJPY has moderately underperformed the S&P futures. I think you see where I'm going with this, EURUSD has significantly underperformed the other markets. So with all else in terms of clear Elliott Wave patterns being equal, it is the prudent choice to get short the relatively weaker FX pair expecting an out-sized downside move. I am looking to lightly sell EURUSD ahead of the NFP tomorrow. Per the SOTD position tracker below, I have orders to sell 1 unit of EURUSD at 1.2900, another unit 1.2945, with stops for both at 1.3055.
Wednesday, September 1, 2010
Risk-On Tone Kicks Off September - Two Possible USDX Wave Counts
North America desk has seen a firm risk-ontone to begin the new month. The dollar is significantly lower, most notably against Aussie (+1.85%), which saw a strong GDP reading of 1.2% vs market consensus of +0.90% . Also helping the Aussie was better than expected Chinese PMI data, 51.7 from last month's 51.2 reading, ahead of the 51.5 consensus. The Chinese data is helping the Aussie currency as continued evidence of a soft landing in the world's 2nd biggest economy will not drastically impact Australian commodity exports. Watching to see how things continue to setup heading out of the summer doldrums and into the typically volatile late September-November time period.
Following an extended vacation I spent quite a long time doing some macro research this morning to get myself back into the groove. After being away from the trading desk for such a long period of time you are sure to lose your feel and rhythm of the market. The only way to get yourself back into battle mode is to take a top-down approach beginning with macro themes, both technical and fundamental, and then moving down to the micro time trading time frames to get the intra-day flow of the market. It will take me a few days to do this. Plus, in accordance with my 2 day rule, I will not trade the first two days back from an extended vacation. So let's get into it.
On the largest time frame, I am bullish of dollars. But drilling down to the daily time frames we need to consider two significantly different paths for the USD before the longer-term uptrend re-emerges. The first calls the entire summer-pullback in the USD all of purple wave .II, and we are in fact rallying in purple wave .III. If this is the case, the currently dollar weakness should hold 81.80 support level.
The alternate USDX daily count says the summer dollar sell off wave just an a-wave within a larger purple .II-wave. If this cont is correct, dollar weakness &40;Euro strength) should be seen until the Index reaches minor support zone #1 of 80.00-79.00, and more likely major support zone # 2 at 78.25-77.25.
Watching in here for now, but eyeing possible EURUSD long entries in accordance with this count. Back as things develop.
Following an extended vacation I spent quite a long time doing some macro research this morning to get myself back into the groove. After being away from the trading desk for such a long period of time you are sure to lose your feel and rhythm of the market. The only way to get yourself back into battle mode is to take a top-down approach beginning with macro themes, both technical and fundamental, and then moving down to the micro time trading time frames to get the intra-day flow of the market. It will take me a few days to do this. Plus, in accordance with my 2 day rule, I will not trade the first two days back from an extended vacation. So let's get into it.
On the largest time frame, I am bullish of dollars. But drilling down to the daily time frames we need to consider two significantly different paths for the USD before the longer-term uptrend re-emerges. The first calls the entire summer-pullback in the USD all of purple wave .II, and we are in fact rallying in purple wave .III. If this is the case, the currently dollar weakness should hold 81.80 support level.
The alternate USDX daily count says the summer dollar sell off wave just an a-wave within a larger purple .II-wave. If this cont is correct, dollar weakness &40;Euro strength) should be seen until the Index reaches minor support zone #1 of 80.00-79.00, and more likely major support zone # 2 at 78.25-77.25.
Watching in here for now, but eyeing possible EURUSD long entries in accordance with this count. Back as things develop.
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