Alanis Morissette will probably disagree but in my opinion, rain on your wedding day is hardly ironic. It could be sad, annoying, or, in the event of an indoor wedding, a non-issue. Similarly, a fly in your chardonnay is simply off putting and in the grand scheme of things, not that big of a deal. What is ironic, however, is Greece's debt rating getting downgraded for the fourth time this year, and Greek equity and bond markets cheering the news.
Greek sovereign debt was downgraded twice this year by Fitch (Oct 22 and again Dec 08) and once by S&P (Dec 15). But it was Moody's downgrade on Dec. 22 that sent Greek markets into a "celebratory" rally. It's really all about perception: Moody's downgraded Greek debt by only one notch as opposed to the two-notch downgrade the market feared. Moody's also commented that near-term crisis is unlikely, which helped ease investors' fears.
Wednesday, December 23, 2009
Daily Recap - 12/23/2009
- Dollar took a little breather today from a remarkably strong rally. DXY briefly touched its steep trend line but quickly bounced back. The index failed to make new highs and broke yesterdays lows (but closed above them) - see chart below. Expect the DXY to find support at 77.50, which is the 23.6% retracement, and turn up to test its recent highs. USD remains strong despite lukewarm economic data today (new home sales worst than expected) and disappointing GDP report (yesterday).
- EUR got some reprieve today as concerns over Greece eased a little and as the Dollar took a pause. The EUR recovered a bit against the dollar and, to a greater extent, against the Pound. It did, however, come under pressure against the Swiss franc as the SNB remained mum regarding the possibility of intervention.
- Aussie finished a good day as gold and commodities climbed.
- Biggest loser today - GBP, losing ground to the Euro and staying flat against the Yen, and Dollar.
- Biggest winner - Canadian Dollar gaining against all major counterparts (extremely strong against the Yen)
- Equities shrugged off a mixed bag of economic data and finished a second day of gains.
Monday, December 21, 2009
The Beginning of a Beautiful Friendship? Well, Maybe
For the better part of 2009, the US dollar and the S&P 500 were on pretty bad terms - as one went in one direction, the other took off in the complete opposite direction. In other words, a strong inverse correlation dominated the relationship between the two. In April 2009, George Soros succinctly described the dollar as the "fever chart" of the economy. Indeed, as the US economy recovered from near-death experience, the fever chart (i.e. dollar strength) went steadily down. Recently, though, the US dollar has been seen walking hand in hand with the S&P, signaling a break from the inverse correlation and a possible, new, positive correlation.
Market correlations form, and fall apart, as dictated by shifting market dynamics. For example, most of the time the correlation between the USD and the price of commodities is inverse. However, in some situations one can observe a positive correlation between the them. Such was the case earlier this year when the dollar and gold rallied at the same time. It is important to take note when a well established correlation breaks or reverses, as it may signal changing market dynamics.
The dollar and the S&P are like a celebrity couple and their relationship garners lots of interest and speculations. But like a celebrity couple, they like to keep everyone guessing - will they stay together, or not? When trying to answer this question, we must first note the fact that we are in year-end/holiday trading mode which means thin volume across the board and a general reluctance on the side of big money managers to take on sizable positions. Having said that, we must also note that it is perfectly normal for currencies and equities of the same country to march in tandem - commonly a sign of a strong economy heading toward, or in the process of, interest rate hikes.
It may be a stretch to describe the US economy as "strong" but I think most people agree that things are getting better and interest rates can only go up from their current levels. It is quite possible then for forward-looking markets to anticipate another step toward normalization which may explain the dollar's and equities' newly found friendship. Will the new relationship hold? Only time will tell.
Market correlations form, and fall apart, as dictated by shifting market dynamics. For example, most of the time the correlation between the USD and the price of commodities is inverse. However, in some situations one can observe a positive correlation between the them. Such was the case earlier this year when the dollar and gold rallied at the same time. It is important to take note when a well established correlation breaks or reverses, as it may signal changing market dynamics.
The dollar and the S&P are like a celebrity couple and their relationship garners lots of interest and speculations. But like a celebrity couple, they like to keep everyone guessing - will they stay together, or not? When trying to answer this question, we must first note the fact that we are in year-end/holiday trading mode which means thin volume across the board and a general reluctance on the side of big money managers to take on sizable positions. Having said that, we must also note that it is perfectly normal for currencies and equities of the same country to march in tandem - commonly a sign of a strong economy heading toward, or in the process of, interest rate hikes.
It may be a stretch to describe the US economy as "strong" but I think most people agree that things are getting better and interest rates can only go up from their current levels. It is quite possible then for forward-looking markets to anticipate another step toward normalization which may explain the dollar's and equities' newly found friendship. Will the new relationship hold? Only time will tell.
Thursday, December 17, 2009
Euro, Trashed
The Euro just can't seem to get a break these days. The beleaguered currency fell out of favor, only two weeks after testing its yearly highs against the USD, following the Greek debt and credit crisis which sent shock waves across the Euro Zone and the currency markets. As storm clouds gathered over Europe, signs of accelerating recovery dominated the US market. And so, in a swift and dramatic change of perception, the USD emerged as the winner.
A shift of such magnitude and velocity in what is probably the most widely traded currency pair in the world (EURUSD) has a serious affect on all other major currencies. The USD traded considerably higher against all major counterparts. Even this year's superstar "commodity currencies" (e.g. Aussie, Loonie) finally succumbed to the dollar's powerful rise and are now trading at multi-week lows against the dollar. The sharp rise in the dollar became self propelled as it brought an end to weeks and months of USD funded carry trades which had to be covered (which, in turn, contributed to the decline in EUR and Aussie). As for the EUR, it is trading lower against most major currencies, even against the less-than-stellar Pound.
The question on everyone's mind now is how much farther does the EUR have to go? and the answer is not that simple. First, one must take into account the possibility of an exaggerated market reaction due to year-end / holiday mode. After all, fundamentally, not too much has changed in 2-3 weeks. Technically, however, the picture is a little different since major support levels for the EURUSD and major resistance levels for the DXY were easily breached in rapid succession. If we attribute at least some dislocation due to year-end dynamics, then we may expect to see some dollar weakness as early as January, especially against higher yielding currencies such as the Australian dollar. But technical levels alone, leave room for the dollar to continue rising and for the Euro to continue its decline.The next firm support for EURUSD is at 1.4200 although we may start seeing some consolidation around the current level of 1.4300.
For the Euro to get some reprieve, we would first need to see some encouraging signs from Greece and some degree of assurance that other problematic EU members (Spain, Austria) have their issues in order. Any Hawkish statements from Mr. J C Trichet, certainly won't hurt either. Other things that might give the Euro a lift are SNB intervention or the very unlikely event of a credit downgrade for the UK. One thing is for sure: it's hard to imagine anyone in the EU is terribly upset about a declining currency. A weaker Euro is a boon for European exporters and Europe's vast tourism industry.
A shift of such magnitude and velocity in what is probably the most widely traded currency pair in the world (EURUSD) has a serious affect on all other major currencies. The USD traded considerably higher against all major counterparts. Even this year's superstar "commodity currencies" (e.g. Aussie, Loonie) finally succumbed to the dollar's powerful rise and are now trading at multi-week lows against the dollar. The sharp rise in the dollar became self propelled as it brought an end to weeks and months of USD funded carry trades which had to be covered (which, in turn, contributed to the decline in EUR and Aussie). As for the EUR, it is trading lower against most major currencies, even against the less-than-stellar Pound.
The question on everyone's mind now is how much farther does the EUR have to go? and the answer is not that simple. First, one must take into account the possibility of an exaggerated market reaction due to year-end / holiday mode. After all, fundamentally, not too much has changed in 2-3 weeks. Technically, however, the picture is a little different since major support levels for the EURUSD and major resistance levels for the DXY were easily breached in rapid succession. If we attribute at least some dislocation due to year-end dynamics, then we may expect to see some dollar weakness as early as January, especially against higher yielding currencies such as the Australian dollar. But technical levels alone, leave room for the dollar to continue rising and for the Euro to continue its decline.The next firm support for EURUSD is at 1.4200 although we may start seeing some consolidation around the current level of 1.4300.
For the Euro to get some reprieve, we would first need to see some encouraging signs from Greece and some degree of assurance that other problematic EU members (Spain, Austria) have their issues in order. Any Hawkish statements from Mr. J C Trichet, certainly won't hurt either. Other things that might give the Euro a lift are SNB intervention or the very unlikely event of a credit downgrade for the UK. One thing is for sure: it's hard to imagine anyone in the EU is terribly upset about a declining currency. A weaker Euro is a boon for European exporters and Europe's vast tourism industry.
Wednesday, December 16, 2009
Daily Recap - 12/16/2009
Happy hump day.
The Fed spoke, the commentators commented, and the market? well, the market made its statement too.
First noticed was the reaffirmation of “exceptionally low” interest rates for “an extended period” - no change there. However, the Fed did go on to say that the economy is still picking up adding that"deterioration in the labor market is abating". Emergency liquidity programs, put in place to prop bonds and asset backed securities, will expire as scheduled in the first quarter of 2010.
The S&P slowly but surely gave back most of its gains for the day following the Fed's release. In the currency markets, USD pairs traded sideways, trying to pick a direction while digesting the Fed's comments. A very clear direction was finally chosen early in the Asian trading session and the USD came out a winner, crushing most of its trading partners. Even the Aussie came tumbling down to levels not seen in 44 days. The EUR took a beating in just about every pair. But against the dollar it dropped like a rock - breaking through one support level after another. It is currently trading at 1.4400, down 740 pips in 14 days - wow.
So once again, it's all relative. Take dovish comments from the RBA, mix with lingering debt concerns in Europe, a struggling economy in the UK, and some mildly upbeat comments from the Fed, and the USD is king - at least for the time being (and not for long if you ask Goldman)
PS - Please feed my fish - just click anywhere on the water
PPS- Feel free to leave comments if you like (or not) what you read here and if there's anything in particular you'd like to see discussed -
Thanks!
The Fed spoke, the commentators commented, and the market? well, the market made its statement too.
First noticed was the reaffirmation of “exceptionally low” interest rates for “an extended period” - no change there. However, the Fed did go on to say that the economy is still picking up adding that"deterioration in the labor market is abating". Emergency liquidity programs, put in place to prop bonds and asset backed securities, will expire as scheduled in the first quarter of 2010.
The S&P slowly but surely gave back most of its gains for the day following the Fed's release. In the currency markets, USD pairs traded sideways, trying to pick a direction while digesting the Fed's comments. A very clear direction was finally chosen early in the Asian trading session and the USD came out a winner, crushing most of its trading partners. Even the Aussie came tumbling down to levels not seen in 44 days. The EUR took a beating in just about every pair. But against the dollar it dropped like a rock - breaking through one support level after another. It is currently trading at 1.4400, down 740 pips in 14 days - wow.
So once again, it's all relative. Take dovish comments from the RBA, mix with lingering debt concerns in Europe, a struggling economy in the UK, and some mildly upbeat comments from the Fed, and the USD is king - at least for the time being (and not for long if you ask Goldman)
PS - Please feed my fish - just click anywhere on the water
PPS- Feel free to leave comments if you like (or not) what you read here and if there's anything in particular you'd like to see discussed -
Thanks!
An Interview with Ed Ponsi on PM Exchange
Ed Ponsi is one of the most insightful traders out there and he has been consistently right (just check some of his older interviews).
Tuesday, December 15, 2009
Trapped in the Rate Race
Recent market action signaled a shift in focus from risk to rate expectations. As previously noted, this was first observed on December 4th when a better than expected non farm payroll report was released sending the USD higher.
A Very Tight Rope
Central banks around the world are walking a very tight rope, balancing a fragile recovery on the one hand and looming inflation on the other. This is an uncomfortable situation with wide political implications: hike rates too soon and you risk a lagging economy and prolonged, high unemployment. Raise rates too late and you will have unleashed a monster inflation. Either scenario is a losing proposition for any administration but the prospect of hyper inflation is by far worse with much broader implications to the economy.
As Mr. Greenspan will probably tell you, maintaining low rates for a long time will eventually result in market distortions in the form of asset bubbles and/or inflation . This is when one nation keeps its rates low - but what happens when the world's leading economies slash rates in an unprecedented, coordinated move? We've yet to find out, but we do know that there's just a lot more money out there, and isn't that the definition of inflation?
Do You Speak Fedish?
Even on a week filled with economic data fanfare, the FOMC is guaranteed to give the best show in town. Higher than expected reading of PPI and CPI in the US and UK respectively sharpened global focus on the possibility of future rate hike. The Fed is highly unlikely to announce rate increases any time soon. However, with the release of the FOMC minutes, scores of commentators all over the media will immediately begin the amusing process of translating the minutes from Fedish to English. Traders, investors and economists alike will scan through the release with a fine-toothed comb in effort to discern even the slightest change in sentiment in order to glean even the faintest hint regarding where rates are headed.
So what to look for? The Fed is unlikely to raise rates before other emergency measures such as the TARP, TALF, and bond purchasing, are wound down. Therefore it is important to look for any signaling or intention to remove these measures. In addition, it is important to pay attention to any changes in sentiment regarding the recovery and comments regarding the prospects of inflation.
In my free time, I took some Fedish lessons, call it Fedish 101. I was able to discern, with moderate certainty that by repeating the point of a "jobless recovery", Mr. Bernanke is setting the stage for rate hikes prior to any noticeable improvement in employment numbers - a move that, unless gently delivered, can deal a blow to a market struggling with a new breed of consumers who simply spend less.
A Very Tight Rope
Central banks around the world are walking a very tight rope, balancing a fragile recovery on the one hand and looming inflation on the other. This is an uncomfortable situation with wide political implications: hike rates too soon and you risk a lagging economy and prolonged, high unemployment. Raise rates too late and you will have unleashed a monster inflation. Either scenario is a losing proposition for any administration but the prospect of hyper inflation is by far worse with much broader implications to the economy.
As Mr. Greenspan will probably tell you, maintaining low rates for a long time will eventually result in market distortions in the form of asset bubbles and/or inflation . This is when one nation keeps its rates low - but what happens when the world's leading economies slash rates in an unprecedented, coordinated move? We've yet to find out, but we do know that there's just a lot more money out there, and isn't that the definition of inflation?
Do You Speak Fedish?
Even on a week filled with economic data fanfare, the FOMC is guaranteed to give the best show in town. Higher than expected reading of PPI and CPI in the US and UK respectively sharpened global focus on the possibility of future rate hike. The Fed is highly unlikely to announce rate increases any time soon. However, with the release of the FOMC minutes, scores of commentators all over the media will immediately begin the amusing process of translating the minutes from Fedish to English. Traders, investors and economists alike will scan through the release with a fine-toothed comb in effort to discern even the slightest change in sentiment in order to glean even the faintest hint regarding where rates are headed.
So what to look for? The Fed is unlikely to raise rates before other emergency measures such as the TARP, TALF, and bond purchasing, are wound down. Therefore it is important to look for any signaling or intention to remove these measures. In addition, it is important to pay attention to any changes in sentiment regarding the recovery and comments regarding the prospects of inflation.
In my free time, I took some Fedish lessons, call it Fedish 101. I was able to discern, with moderate certainty that by repeating the point of a "jobless recovery", Mr. Bernanke is setting the stage for rate hikes prior to any noticeable improvement in employment numbers - a move that, unless gently delivered, can deal a blow to a market struggling with a new breed of consumers who simply spend less.
Monday, December 14, 2009
Weekly Highlights December 6-11 2009
- DXY - Dollar continued to climb up on the backdrop of better than expected economic readings. Technically, the DXY marked some major milestones:
- Close above the 10 week EMA for the first time since April
- Break above the 50 day MA
- Moving average crossover on the upside
- EURUSD - traded down on stronger USD and concerns over Greece and other Eurozone members.
- EURUSD closed below the 10 week EMA for the first time since April
- Possible support on the 20 week EMA and expected consolidations around 1.4600
- AUDUSD - traded down as well, although showed relative strength compared to the EURUDS and GBPUSD.
- JPY - Yen pairs seem to be forming a base and a reversal from Yen strength to Yen weakness is expected. Any good news (or not worse than expected news) may facilitate this swing in the Yen. In addition, watch for any remarks from Japanese officials regarding high Yen.
Friday, December 11, 2009
US Retail Numbers and the USD
This morning's retail numbers came in better than expected. Once again, the USD gained strength on good economic news. Coupled with the USD's reaction to a much better than expected NFP report last Friday, we begin to see the USD trade on rate expectations and not just on pure risk appetite/aversion.
Any so called USD carry trades might be unwound pretty quickly, helping to lift the USD even higher. At this point, it looks like the USD can gain both on good news (i.e. rate hike expectations) and bad news (i.e risk aversion).
On the technical side, the DXY (dollar index), is poised to test resistance at 76.50 which, if broken, may clear the way to further gains. It is also important to note how the USD behaves differently vs. different currencies. Notice the strong move up against JPY, EUR, GBP (the first in overbought territory, the latter two under fundamental pressure) - and the relatively mild gains against the Aussie and CAD.
US Futures signaling a possible up day for the S&P. An up day for the S&P with gains for the USD will further cement the observations above.
Any so called USD carry trades might be unwound pretty quickly, helping to lift the USD even higher. At this point, it looks like the USD can gain both on good news (i.e. rate hike expectations) and bad news (i.e risk aversion).
On the technical side, the DXY (dollar index), is poised to test resistance at 76.50 which, if broken, may clear the way to further gains. It is also important to note how the USD behaves differently vs. different currencies. Notice the strong move up against JPY, EUR, GBP (the first in overbought territory, the latter two under fundamental pressure) - and the relatively mild gains against the Aussie and CAD.
US Futures signaling a possible up day for the S&P. An up day for the S&P with gains for the USD will further cement the observations above.
Thursday, December 10, 2009
Daily Recap - 12/10/2009
- Stock market manged to gain today, on low volume, despite disappointing unemployment claims (although 4 week MA for unemployment claims was down and trade balance came in better than expected)
- Despite the advances in the equities market, the USD and JPY maintained relative strength vs. most currencies for a good part of the day. This may signal some bearish sentiment, which would make sense as the picture in Greece, Spain, Dubai becomes clearer.
- Aussie and CAD showing relative strength vs. USD while EUR and GBP showing relative weakness.
- China economic reading - mainly positive. This may cause the JPY to give back some of its recent gains.
- Morgan Stanley said said Yen intervention risk is "high"
-All eyes will be on the retail numbers coming out at 8:30. Will be interesting to note USDs reaction to the numbers, especially if they surprise on the upside and the USD strengthen.
-Yen will likely decline on good retail numbers
USD - Back to Fundamentals?
I know I mentioned the December 4th NFP report in previous posts but I think it is worth pointing out again since it possibly signaled the first sign of some normalization in the forex markets, namely, return to fundamentals.
On December 4th, for the first time in months, the USD rallied on good economic news and the S&P rose at the same time as well. Of course, this was a single event and far from being a trend. However, it is important to note the USD's reaction to today unemployment numbers - the report came in worse than expected and the USD's initial reaction was to decline! this is in stark contrast of what we've been seeing since March.
Another interesting thing to point out is the relative strength of currencies vs. the USD. When the unemployment number came out, the Aussie and CAD gained substantially more against the USD than did the EUR and GBP. This means we may start to further normalization where the USD gains against weaker currencies and lose ground to stronger currencies.
On December 4th, for the first time in months, the USD rallied on good economic news and the S&P rose at the same time as well. Of course, this was a single event and far from being a trend. However, it is important to note the USD's reaction to today unemployment numbers - the report came in worse than expected and the USD's initial reaction was to decline! this is in stark contrast of what we've been seeing since March.
Another interesting thing to point out is the relative strength of currencies vs. the USD. When the unemployment number came out, the Aussie and CAD gained substantially more against the USD than did the EUR and GBP. This means we may start to further normalization where the USD gains against weaker currencies and lose ground to stronger currencies.
Wednesday, December 9, 2009
Daily Recap - 12/09/2009
- Greek credit continued to dominate headlines and maintain pressure on the markets. In addition, looming concerns regarding Spain's economy kept the EUR tame vs. the USD
- In the UK, the GBP came under pressure after the ministry of finance released data forecasting the economy may have slowed more than was previously predicted (-4.75 for the year vs. -3.25%)
- USD managed to maintain most of its gains and is still showing signs of strength, despite an unexpected positive day for the S&P which led the USD to relent some of its recent gains
- Japan's economy grew at a much slower rate than preliminary data showed in November. This is a very significant issue as it presses the BoJ and the Japanese government to be extra averse to strong Yen thus increasing the chance of intervention or, at the very least, more direct rhetoric against a strong Yen. However, the Yen maintained its safe haven status today and retreaded only as the stock market advanced.
- US to extend TARP until Oct. 2010
Excuse me, sir, this Yen is a little overdone!
Can you believe it? it's been almost ten years since we welcomed the new millennium. Ah, the year 2000.... the year that brought us such great excitement of a bright and promising future was also the year that brought us the wrath of the burst of the dot com bubble. It was also the year that brought us what is possibly the greatest carry trade ever - the Yen carry trade. With interest rates effectively at zero, the Yen became the vehicle of choice for funding carry trades against other higher yielding currencies such as the Aussie, Kiwi, and the Euro. It was a smooth sail for carry traders that lasted the good part of a decade - a time of (what then seemed to be) risk free, free money. Investors raked it in hand over fist, collecting interest payments while their higher yielding assets kept appreciating relentlessly. As the world economy recovered from the dot com bust, sending interest rates higher everywhere but Japan, the carry trade became self-propelled. Even a rising Japanese equities market accompanied by moderate rate hikes as of July of 2006 did almost nothing to cool the red-hot carry trade.
Then came Bear Sterns, then Lehman, then....a series of global rate cuts as legions of talking heads on CNBC declared the end of the world was finally here. The unwinding of the carry trade was fast and furious. Within four months(!!!), the Yen has pared a decade's worth of losses as traders rushed to cover their short positions while many others flocked to the Yen, seeking its relative safety in uncertain times. Even as the carry trade seemed completely unwound, the Yen maintained its safe haven status and readily bounced on any sign of weakness in the global recovery which started on March 9th 2009.
A New Government Steps In
Following an August election, a new government, led by the Democratic Party of Japan, took power in September of 2009. With less than one month in office, the newly appointed finance minister, Mr. Fujii, already managed to cause waves in the foreign exchange markets by talking up a strong Yen. We may never know exactly why did Mr. Fujii made such dubious comments in his first days in office. But the result was obvious, and an already upward moving Yen was pushed even higher.
In November of 2009, the global recovery (or bear rally - you decide) showed signs of fatigue and concerns over the sustainability of the recovery started to arise. On November 15th, Japan's preliminary GDP numbers came in much better then expected. The stronger economic reading for Japan, coupled with a global recovery in question, sent the the Yen on a two week dash that culminated over the Thanksgiving holiday with news of Dubai's impending credit crisis sending tremors throughout the global markets. Even as the dollar advanced against most other currencies, it lost ground to the Yen, reaching low levels not seen in years.
It did not take long for the Japanese government to change its tune as a strong Yen put too much pressure on a very fragile and very export dependent economy. Japanese rhetoric reversed and officials were quick to point out that Yen strength came on the back of a weak dollar without any fundamental basis. Of course, with a struggling economy, aging population, astronomical debt, zero interest rates as far as the eye can see, and loose monetary policy, what fundamental reason is there for the Yen to go higher?
Friday's NFP report shed some light on what could be fueling the Yen's relentless rise - flight to safety. The NFP report, which came in much better than expected sent the Yen on a sharp move down against the USD and other major currencies. The NFP numbers and easing concerns about Dubai (which proved to be short lived) gave the market a glimmer of hope and the Yen's reaction is indicative of its role as a safe haven. Since Friday, dark clouds have gathered once again in the form of credit downgrade in Greece, gloomy outlook in Spain, and lingering concerns regarding Dubai. The result? a stronger Yen.
Waiting for Intervention
Talks about Japanese intervention have surfaced in the media over the last couple of weeks and as of today, it seems a somewhat likely scenario. This is a major shift in paradigm for Mr. Fujii from his remarks back in September. Of course, intervention is an extreme measure and is not guaranteed to work - so whether or not the BoJ will intervene is anyone's guess. What is more likely to happen is for Yen pair to base in the short term, creating an invisible fence to ward of Yen bulls. This line in the sand may provide excellent buying opportunities in some Yen pairs, esp. against strong currencies like the Canadian dollar or the Aussie.
Then came Bear Sterns, then Lehman, then....a series of global rate cuts as legions of talking heads on CNBC declared the end of the world was finally here. The unwinding of the carry trade was fast and furious. Within four months(!!!), the Yen has pared a decade's worth of losses as traders rushed to cover their short positions while many others flocked to the Yen, seeking its relative safety in uncertain times. Even as the carry trade seemed completely unwound, the Yen maintained its safe haven status and readily bounced on any sign of weakness in the global recovery which started on March 9th 2009.
A New Government Steps In
Following an August election, a new government, led by the Democratic Party of Japan, took power in September of 2009. With less than one month in office, the newly appointed finance minister, Mr. Fujii, already managed to cause waves in the foreign exchange markets by talking up a strong Yen. We may never know exactly why did Mr. Fujii made such dubious comments in his first days in office. But the result was obvious, and an already upward moving Yen was pushed even higher.
In November of 2009, the global recovery (or bear rally - you decide) showed signs of fatigue and concerns over the sustainability of the recovery started to arise. On November 15th, Japan's preliminary GDP numbers came in much better then expected. The stronger economic reading for Japan, coupled with a global recovery in question, sent the the Yen on a two week dash that culminated over the Thanksgiving holiday with news of Dubai's impending credit crisis sending tremors throughout the global markets. Even as the dollar advanced against most other currencies, it lost ground to the Yen, reaching low levels not seen in years.
It did not take long for the Japanese government to change its tune as a strong Yen put too much pressure on a very fragile and very export dependent economy. Japanese rhetoric reversed and officials were quick to point out that Yen strength came on the back of a weak dollar without any fundamental basis. Of course, with a struggling economy, aging population, astronomical debt, zero interest rates as far as the eye can see, and loose monetary policy, what fundamental reason is there for the Yen to go higher?
Friday's NFP report shed some light on what could be fueling the Yen's relentless rise - flight to safety. The NFP report, which came in much better than expected sent the Yen on a sharp move down against the USD and other major currencies. The NFP numbers and easing concerns about Dubai (which proved to be short lived) gave the market a glimmer of hope and the Yen's reaction is indicative of its role as a safe haven. Since Friday, dark clouds have gathered once again in the form of credit downgrade in Greece, gloomy outlook in Spain, and lingering concerns regarding Dubai. The result? a stronger Yen.
Waiting for Intervention
Talks about Japanese intervention have surfaced in the media over the last couple of weeks and as of today, it seems a somewhat likely scenario. This is a major shift in paradigm for Mr. Fujii from his remarks back in September. Of course, intervention is an extreme measure and is not guaranteed to work - so whether or not the BoJ will intervene is anyone's guess. What is more likely to happen is for Yen pair to base in the short term, creating an invisible fence to ward of Yen bulls. This line in the sand may provide excellent buying opportunities in some Yen pairs, esp. against strong currencies like the Canadian dollar or the Aussie.
Tuesday, December 8, 2009
Daily Recap - 12/08/2009
- Market action was dominated by two news stories: 1. Fitch downgraded Greece's credit rating to BBB+ with negative outlook and 2. lingering concerns over Dubai credit woes.
- Major stock indexes down more than 1% while USD keeps upside momentum and for the first time in weeks closed decidedly above the 50 day MA as it bounced off support.
- JPY resumed its rally but intervention becoming a more likely scenario with each passing day
- Obama calls to unwind TARP
Monday, December 7, 2009
Can You Spare a Buck?
It's been a tough ride for the USD since March, not so much of a roller-coaster as a Double Black Diamond slope. The USD peaked earlier this year due to extreme levels of fear and uncertainty in the global financial markets. The end of the world seemed like a done deal and the all-mighty Dollar was everyone's bet (mostly in the form of US treasuries), in what was dubbed the "risk aversion" trade. Since March, however, the USD declined, in a twisted way, on every piece of good news that would normally make a currency stronger. And thus came about the "risk trade". With historically low interest rates and generous QE, the dollar was left alone and defenseless, surrounded by some very scary bears with their claws sharpened and ready for the attack.
Vociferous pros eulogize the greenback daily on various financial media outlets and foreign governments diversify their reserve holdings with gold (India) and Canadian Dollar (Russia). Indeed, the currency has not been able to stick its head above the 10 EMA (weekly, see below) since May. However, even among the big bears out there, there seems to be a growing consensus that a bear rally is in the cards and Friday's market action could have signaled the opening shot.
Fundamental, meet Technical
Fundamentally speaking, there are two scenarios in which the USD slide can reverse, even if only for a relatively short period, and they are (1) deterioration of financial markets and return to risk aversion or (2) interest rate hike by the Fed. Technically speaking, the DXY (aka dollar index) is entering a support level (see weekly chart below) in the 74.50 to 71.50 range.
It always astonishes me when trend-shifting fundamental news "magically" coincide with major technical levels. Over the past two weeks, the DXY came close to a major weekly support level and, wouldn't you know, we got a taste of both bullish scenarios for the USD.
The first came in the form of financial turmoil in Dubai (risk aversion). The second came a week later in the form of much better than expected NFP numbers, causing markets to expect rate hikes earlier than previously predicted.
Of the two events, Friday's NFP report was much more significant because while the reaction to Dubai World's woes was according to expectations, the reaction to the NFP numbers marked the first time in months when a good economic reading led to a stronger dollar signaling a possible break from the inverse relationship between the dollar and the state of the economy (and the equities marker).
Obviously, it is too early to to tell if the dollar rally will fizzle or sizzle and the dollar bulls should hold off on the champagne - at least until New Year's.
Vociferous pros eulogize the greenback daily on various financial media outlets and foreign governments diversify their reserve holdings with gold (India) and Canadian Dollar (Russia). Indeed, the currency has not been able to stick its head above the 10 EMA (weekly, see below) since May. However, even among the big bears out there, there seems to be a growing consensus that a bear rally is in the cards and Friday's market action could have signaled the opening shot.
Fundamental, meet Technical
Fundamentally speaking, there are two scenarios in which the USD slide can reverse, even if only for a relatively short period, and they are (1) deterioration of financial markets and return to risk aversion or (2) interest rate hike by the Fed. Technically speaking, the DXY (aka dollar index) is entering a support level (see weekly chart below) in the 74.50 to 71.50 range.
It always astonishes me when trend-shifting fundamental news "magically" coincide with major technical levels. Over the past two weeks, the DXY came close to a major weekly support level and, wouldn't you know, we got a taste of both bullish scenarios for the USD.
The first came in the form of financial turmoil in Dubai (risk aversion). The second came a week later in the form of much better than expected NFP numbers, causing markets to expect rate hikes earlier than previously predicted.
Of the two events, Friday's NFP report was much more significant because while the reaction to Dubai World's woes was according to expectations, the reaction to the NFP numbers marked the first time in months when a good economic reading led to a stronger dollar signaling a possible break from the inverse relationship between the dollar and the state of the economy (and the equities marker).
Obviously, it is too early to to tell if the dollar rally will fizzle or sizzle and the dollar bulls should hold off on the champagne - at least until New Year's.
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