Rising Yields Cement Dollar's New Highs

Positive developments yesterday (Thursday) sent stocks and the USD higher. While stocks gave up their gains during the last hour of trading, the dollar remained strong. The greenback gained against all its major counterparts, including the commodity currencies, aided by rising Treasury yields. Here's a quick recap of yesterday's news:

1. Unemployment numbers came in slightly better than expected.
2. Strong earnings/guidance from Best Buy and Qualcomm.
3. Citi gained on news suggesting the Treasury will unveil a plan to sell its stake in the bank.
4. Bernanke gave the market another fix of its favorite drug - commitment to keeping easy, cheap money flowing.
5. France, Germany find common grounds for Greece assistance package involving the IMF (but euro makes new lows)

Perhaps the most important development is the sharp rise in 10yr Treasuries which soared after a less than stellar demand for the notes during recent auctions. Would be buyers are already bloated with US government debt and concerns over sovereign debt do not make T notes any more appetizing. Add the potential of inflation to the mix and you have a market demanding higher yields. Higher yields on Treasuries may entice new buying which could keep the yields in check. However, if buyers remain reluctant and demand even higher yields, the Fed may be forced to raise rates sooner than later. Any way, this scenario is largely bullish for the dollar but may or may not be bullish for stocks and commodities (for example, premature rate hikes may hinder the recovery and therefore be negative for stocks and commodities. Likewise, rising yields may push mortgage rates up. Couple that with the Fed ending its MBS purchase program and the eventual demise of the home buyers tax credit - and you might have a recipe for double-dip in housing).

 The potential Greece rescue deal continues to expose deep divides within the EU. It's getting pretty clear at this point that the clock is ticking and something must be done to prevent contagion. After all, the EU cannot afford to let Greece go down the path of Lehman Bros. Therefore, it is safe to assume that under pressure, EU leaders will announce a detailed deal within the next 48 hours. Depending on its conditions, the deal may provide a short relief to the euro but any rally is likely to fade quickly. Greek/German spread have actually come down since late January as the euro continued its precipitous decline. So a fix for Greece may not be a cure for the euro. So much of Europe's destiny is riding on perception. There will be buyers for Greek (Italian, Portuguese, Spanish) debt. The question is, at what cost? If risk perception is high, the cost of borrowing will be high - perhaps high enough to actually drive some of these sovereign nations to the brink.

As noted in previous post, 1175 was seen as the next resistance for the S&P and, indeed, the broad market index was unable to sustain this level. It is important to mention that this was more of a "psychological" level rather than a purely technical resistance/supply zone. The S&P finished the day with a very bearish candle formation, suggesting more downside may follow. After a nearly two month wild rally, and a rising VIX we should not be surprised to see a 1%~2% pullback to the 1150-1130 area. Falling stocks should weigh on commodities and commodity currencies and we may continue to see the Aussie and loonie lose more ground to the almighty (for now) dollar. AUDUSD chart indicates downside risk:

Wild Card Friday

The S&P 500 has been trading in a narrow, 10 point range (1116-1125) since Tuesday. For the most part, the stock market has treated both good and bad economic reports with the same indifference. But Friday promises to end the week with a crescendo: US non-farm payroll report. The results of the much anticipated report and its subsequent interpretation are anyone's guess. Wednesday ADP report showed a loss of about 20,000 jobs in February, definitely not a good number but in line with a declining trend of job cuts. The NFP, which is calculated differently than ADP's, is expected to be adversely impacted by February's snow storms.

The S&P's daily chart looks bullish and a retest of January's 1150 high seems closer than ever. Still, signs of risk aversion are apparent, most notably in a stronger yen.

There are 3 possible outcomes for tomorrow's NFP report:
1. Inline with expectations  -should be positive for the stock market but potentially damaging to the US dollar and yen.
2. Better than expected - should, obviously, be positive for the stock market and negative for the yen. A slightly better NFP number could prove negative for the dollar while a much better than expected could lift the dollar higher (recall Dec 4 2008 NFP report).
3. Worse than expected - a slightly worse than expected report is somewhat anticipated and is already factored in. So if the number is only slightly worst than expected, the market might breath a sigh of relief and charge forward. In this case both the yen and the US dollar might pair gains. Having said that, a MUCH worse than expected will surely be negative for the stock market and support stronger US dollar and yen.

Another Friday wild card, with a potential for an upside surprise, is the Papandreou/Merkel meeting. The German Chancellor was quick to point out the meeting was largely symbolic in nature and not intended to discuss a possible bailout for Greece. Still, we should expected them to come out with some reassuring statements regarding the strength of the EU and its resolve to stick together in tough times.

In short, it's almost impossible to predict what will happen tomorrow. One thing for sure, it will not be boring!

S&P Closes (slightly) Up - but Yen Says, Fear is Here

The S&P started the week with a strong move up, closing above its 50 day MA for the first time in over a month. Tuesday morning saw a strong opening for stocks but weakness emerged toward the closing. As we mentioned in the weekly review on Saturday, yen strength is a red flag. Hopefully, the S&P will move higher and the red flag will turn out to be nothing more than a red herring but for now we must to stay vigilant The yen's strength today was evident not only against the battered euro and British pound but also against the strong USD, the loonie, and the Aussie dollar.

It's too early to say if the relatively strong yen is meaningful but we have to remember that in the past, it's been a bad omen for the markets. You might recall the days preceding the Dubai debt crisis in late Nov. 2009. In the days BEFORE Dubai hit the headlines, the yen soared with no apparent reason. Perhaps traders are betting on a weak ADP report on Wednesday morning. That would not be a complete surprise as recent news suggests. Or perhaps, more bad news from the EU or the UK is bubbling to the surface. And then again, it could be just a temporary state of nervousness as the S&P approaches a major resistance. Whatever the case maybe, we must not ignore the sign. Keep you stops tight!

Daily Recap - 02/18/2009

1. Despite a mixed bag of economic readings, the S&P managed to claw its way above 1100 to close at 1106. 
2. Unfortunately, it would seem like this "breakout" was doomed to fail - the Fed announced it will be raising its discount rate by 0.25% to 0.75%. This came as somewhat of a surprise and in after hour trading, stocks receded and, as expected, Financials were among the biggest losers. 
3. In my weekly review I wrote: "Any further comments from the Fed regarding its exit strategy should help maintain dollar strength, especially vs. the Euro and British pound" well - it happened and the dollar made fresh highs against the euro and the British pound (as well as other currencies)
4. At this point, we are likely to see further USD gains, especially against the weak euro and British pound.
5. It remains to be seen how the market will interpret the Fed's move. There is an unlikely scenario in which the move will be interpreted as a sign of strength - i.e. a Fed's vote of confidence in the recovery. However, at least in the short run, this move is much more likely to drag financials (and the broader market) lower as investors figure out the consequences.

-forexRoy

Daily Recap - 02/17/2009

1. S&P pushed up against its 1100 resistance but was not able to break it. The broad index did manage almost 5 point gain as good earning reports and positive economic data helped ease fears over Greece and the Euro.
2. S&P is about to meet its 50 day MA, this time from below - it should be interesting to see if the moving average, which served as somewhat of a support during the 09 rally, will now serve as resistance.
3. The dollar has maintained its recent highs even as equities moved higher. Dollar strength comes largely due to Euro weakness as the single currency fails to shake off investors' concerns. 
4. Fed minutes released today revealed (no surprise) that the Fed is ready to remove some of the emergency measures put in place. Market's reaction to the report was muted.
5. Major economic data released tomorrow: PPI, unemployment claims, and Philly manufacturing index. A better than expected (or even in-line) reading should help the S&P extend beyond its current 1100 level. Such a move should also support a continued move higher for the USDJPY and other yen pairs. A better than expected reading should also facilitate greater USD strength against the Euro.
6. Conversely, a surprise on the downside will definitely sent stocks lower. In this scenario, we should expect to see EURJPY trending lower, possibly to test its recent lows.

Daily Recap - 02/16/2009

1. positive earning reports, Japan's better than expected preliminary GDP, and signs of coordinated EU action with respect to Greece helped traders work up some appetite for risk. The S&P 500 bounced almost 20 points as the US dollar and Japanese yen receded against their major counterparts. 
2. But caution is still warranted. the S&P is rallying straight into resistance at 1100. Even if it breaks above, it still has to deal with a much stronger resistance at 1150.
3. In addition, renewed concerns about Dubai's debt (although small in comparison) have resurfaced.
4. As expected, the USD is under consolidation. News that China reduced some of its US treasuries holdings last month certainly did not inspire any dollar strength.
5. Note worthy - DXY 50 and 200 MAs cross over in what is known as the "golden cross". Momentum traders will often interpret this event as confirmation of the trend which may suggest further strength for the USD.
6. Once again, Loonie and Aussie look strongest against both the dollar and yen.Aussie has regained strength after a recent RBA statement mentioned more interest hikes are in store for this year.
7. Note - speculation is growing that China will let its currency appreciate by up to 5% against the dollar.

Daily Recap - 12/23/2009

1. 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).
   
2. 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.
3. Aussie finished a good day as gold and commodities climbed.
   
4. Biggest loser today - GBP, losing ground to the Euro and staying flat against the Yen, and Dollar.
5. Biggest winner - Canadian Dollar gaining against all major counterparts (extremely strong against the Yen)
6. Equities shrugged off a mixed bag of economic data and finished a second day of gains.
   

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)

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Daily Recap - 12/10/2009

1. 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)
2. 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. 
3. Aussie and CAD showing relative strength vs. USD while EUR and GBP showing relative weakness.
4. China economic reading - mainly positive. This may cause the JPY to give back some of its recent gains.
5. Morgan Stanley said said Yen intervention risk is "high"

Important numbers for tomorrow:
-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

Daily Recap - 12/09/2009

1. 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
2. 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%)
3. 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
4. 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.
5. US to extend TARP until Oct. 2010
   

Daily Recap - 12/08/2009

1. 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. 
2.  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.
3. JPY resumed its rally but intervention becoming a more likely scenario with each passing day
4. Obama calls to unwind TARP