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.
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