EU leadership has been reluctant to even consider the possibility of IMF support for Greece - until today. Germany signaled IMF help may be appropriate after all. The idea is not without merit. The IMF can act somewhat independently of convoluted European politics. In addition, the EU will not be setting a dangerous precedence with a Greek bailout. IMF assistance may or may not be the best solution for Greece. But for the euro, that is not what really matters. What matters for the euro is a decisive plan of action that will put an end to weeks of political bickering.
The euro suffered some its worse one day declines on Thursday but as of this evening, EURUSD found support around 1.36 which coincided with Germany's comments regarding Greece and the IMF. A decisive plan of action, even if it eventually fails, will undoubtedly stoke a euro relief rally and pressure the US dollar.
Thursday, March 18, 2010
USD On The Move
US dollar is visibly stronger today across the board. The most obvious factor here is the failed Greek bailout plan. Euro dollar is the most widely traded currency pair and the euro is the biggest component of the DXY, the basket of currencies widely used to measure the dollar's strength. As such, material weakness in the euro will translate to USD strength against most of its trading counterparts.
Technically, the DXY chart looks strong. Despite a break below its recent channel (see chart below), the index bounced off its 50 day MA and, more importantly, bounced off its 79.50 support.
Other factors to consider: the S&P 500 is overextended and likely to pull back or trend sideways. As previously mentioned, 1166 is still a valid resistance for the S&P. A pullback in stocks will likely reduce risk appetite which may help the USD gain vs. the commodities currencies and further boost the dollar. In addition, there's some speculation regarding another unscheduled discount rate hike. The last hike was unscheduled and occurred exactly one month ago.
Taken together, the evidence is pointing to a stronger dollar on the backdrop of risk aversion.
CLICK ON CHART TO SEE LARGER IMAGE
Technically, the DXY chart looks strong. Despite a break below its recent channel (see chart below), the index bounced off its 50 day MA and, more importantly, bounced off its 79.50 support.
Other factors to consider: the S&P 500 is overextended and likely to pull back or trend sideways. As previously mentioned, 1166 is still a valid resistance for the S&P. A pullback in stocks will likely reduce risk appetite which may help the USD gain vs. the commodities currencies and further boost the dollar. In addition, there's some speculation regarding another unscheduled discount rate hike. The last hike was unscheduled and occurred exactly one month ago.
Taken together, the evidence is pointing to a stronger dollar on the backdrop of risk aversion.
CLICK ON CHART TO SEE LARGER IMAGE
Wednesday, March 17, 2010
Too Cautious?
My weekend review contained more than a grain of caution. However, market news and price action since Monday were quite positive. The sanguine mood set in on Monday when Senator Dodd revealed his financial reform blueprint, which the market found less than threatening. Stocks rallied immediately following Mr. Dodd's press conference and S&P futures drifted higher overnight. On Tuesday, the market received another boost, this time, from the FOMC. The Fed delivered another shot of adrenaline as it maintained its "extended period" language. The S&P 500 broke above its 1150 resistance and today (Wednesday), a lower than expected inflation reading pushed the broad market higher.
Let's take another look at the weekend hypotheses and see how they measured up so far:
1. Greece bailout and FOMC statement to set the tone for the week - hawkish "surprises" will set the stage for stronger dollar and pullback in risk appetite - Greece's bailout turned out to be more of a mess than anything else, but sometimes it's the thought that counts. At least for the first two trading days of week, concerns over Greece abated to some degree. Sending the euro higher.
The Fed, however, did not deliver any hawkish surprises in its statement. In fact, since the market was bracing for a possible hint of tightening, equities rallied in relief and the dollar slumped.
2. S&P500 at major resistance level. Break above 1150 expected to be capped at 1166. The more likely scenario, is sideways consolidation or a pullback to key support (1130, 1112). - The S&P did indeed break above 1150 and so far, capped exactly at 1160. Coincident? maybe, but we'll know more by the end of the week.
3. Expect a limited euro rally but capped at 1.3850 or 1.4000. - we did get a bounce in the euro. As of this time, it seems that euro was unable to break 1.3800 and is starting to head back down.
4. GPB priced in for a worst case scenario - as such, counter-trend bounce should not surprise but capped at 1.5550 - GBP bounce back did materialize aided by a better than expected UK unemployment numbers. We should still expect to see selling into GBP rallies.
5. Japanese hints of intervention and easing concerns over Greece, should keep yen on the decline. Any yen rallies should be limited. - USDJPY is pretty much flat since Sunday despite Tuesday's (Japan Wednesday) BoJ commitment for further easing to fight deflationary forces. The yen did loose some ground to the loonie and aussie. At this point, my assumption is that yen strength is a function of repatriation and that yen will continue to decline.
6. Loonie - ever closer for parity.
My view is that caution is still warranted. The recovery is still vulnerable and there are multiple single points of failure. Moreover, Mortgage Backed Securities (MBS) purchases by the Fed are scheduled to end this month and no one can tell for sure what impact it will have on the housing market (presumably, not a good one). Further tightening measures by China can also spook the markets and the eventuality of the Fed's tightening will have to set in at some point.
Let's take another look at the weekend hypotheses and see how they measured up so far:
1. Greece bailout and FOMC statement to set the tone for the week - hawkish "surprises" will set the stage for stronger dollar and pullback in risk appetite - Greece's bailout turned out to be more of a mess than anything else, but sometimes it's the thought that counts. At least for the first two trading days of week, concerns over Greece abated to some degree. Sending the euro higher.
The Fed, however, did not deliver any hawkish surprises in its statement. In fact, since the market was bracing for a possible hint of tightening, equities rallied in relief and the dollar slumped.
2. S&P500 at major resistance level. Break above 1150 expected to be capped at 1166. The more likely scenario, is sideways consolidation or a pullback to key support (1130, 1112). - The S&P did indeed break above 1150 and so far, capped exactly at 1160. Coincident? maybe, but we'll know more by the end of the week.
3. Expect a limited euro rally but capped at 1.3850 or 1.4000. - we did get a bounce in the euro. As of this time, it seems that euro was unable to break 1.3800 and is starting to head back down.
4. GPB priced in for a worst case scenario - as such, counter-trend bounce should not surprise but capped at 1.5550 - GBP bounce back did materialize aided by a better than expected UK unemployment numbers. We should still expect to see selling into GBP rallies.
5. Japanese hints of intervention and easing concerns over Greece, should keep yen on the decline. Any yen rallies should be limited. - USDJPY is pretty much flat since Sunday despite Tuesday's (Japan Wednesday) BoJ commitment for further easing to fight deflationary forces. The yen did loose some ground to the loonie and aussie. At this point, my assumption is that yen strength is a function of repatriation and that yen will continue to decline.
6. Loonie - ever closer for parity.
My view is that caution is still warranted. The recovery is still vulnerable and there are multiple single points of failure. Moreover, Mortgage Backed Securities (MBS) purchases by the Fed are scheduled to end this month and no one can tell for sure what impact it will have on the housing market (presumably, not a good one). Further tightening measures by China can also spook the markets and the eventuality of the Fed's tightening will have to set in at some point.
Sunday, March 14, 2010
Beware the Ides of March
-------------Weekly Summary-----------
1. Greece bailout and FOMC statement to set the tone for the week - hawkish "surprises" will set the stage for stronger dollar and pullback in risk appetite.
2. S&P500 at major resistance level. Break above 1150 expected to be capped at 1166. The more likely scenario, is sideways consolidation or a pullback to key support (1130, 1112).
3. Expect a limited euro rally but capped at 1.3850 or 1.4000.
4. GPB priced in for a worst case scenario - as such, counter-trend bounce should not surprise but capped at 1.5550
5. Japanese hints of intervention and easing concerns over Greece, should keep yen on the decline. Any yen rallies should be limited.
6. Canadian dollar set for another swing at parity with USD.
----------------------------------------------------------
Beware the Ides of March
OK - clearly not the most original headline for a blog post on March 14 but a fitting one nonetheless. As we enter the second half of March, we find the Market in a precarious position and the bulls and the bears at an impasse. This time last year was fortuitous for market participants holding long positions in stocks and high yielding bonds and currencies. After a seven month free-fall, the downside risk was limited, if only by the end-of-the-world sentiment that was baked into cake. When perception changed and market participants realized the end of the world was not quite ready to manifest itself, a dramatic rally in "risky" assets ensued fueled further by massive, unprecedented amounts of cheap money pumped into the global economy.
But after twelve months of remarkable gains, the stock market rally is more mature and its momentum has waned due to lingering concerns over sovereign debt, commercial RE, tentative consumer demand, the eventuality of monetary tightening and the uncertain consequences of central banks' exit strategies. Clearly, this year the risk is more to the downside or, at least some sideways consolidation. Even a breakout above 1150 is no guarantee for extended rally. In fact, strong resistance zones loom just above the 1150 level. And 1225 is a major resistance zone marking a confluence of technical analysis elements (resistance lines, 68.8% Fibonacci retracement level, major moving averages). The combination of technical resistance and questionable fundamentals will no doubt keep risk appetite at bay.
Whether or not we will see the S&P break decisively above 1150 is impossible to predict. However, it is safe to assume that a major move will not take place prior to the FOMC statement on Tuesday. From the data we have, we can expect a more hawkish remarks that may spook the market. We will find out if others at the Fed adopted Mr. Hoenig's hawkish views. Actually, we should expect some hawkish "surprise".
Of course, hawkish remarks from the Fed could be interpreted as a sign of strength and a validation of the recovery - but this is the least likely scenario. Over the past months one could have observed on numerous occasions the close link between the risk trade and loose monetary policies. So where does that leave us?
S&P 500 - The Trend is Your Friend (until it ends)
To get a better understanding, we must zoom out and look at the bigger picture. First, let's look at the weekly chart. Despite a slight negative divergence with the RSI, the chart still looks bullish and a break above 1150 is still within reach.
But what if we break above 1150? For that answer, we must look back to September 2008, the last time the S&P held such lofty levels. We can see from the chart below (the image is spliced to fit the screen) that the real supply zone looms at the 1166 level - the origin of a huge move down. 1166 is as critical (if not more) as 1150 and we are only a few points away.
Bottom line, the S&P is still in "the mouth of the dragon" with sideways consolidation and/or limited pullback to key support areas (1130, 1112)being the most likely scenario. Any upward moves are likely to be capped at 1166.
USD - Time to Move
As expected, the DXY pulled back slightly, stopping just shy of our 79.50 target. After 34 days of sideways consolidation, we can expect the dollar to choose a clear direction. The dollar index COT graphs reveal sustained elevated levels of net long positions. This is inline with the sustained extreme net-short positions for the euro and GBP. In recent weeks, we referred to the USD as win-win on the notion that both highly positive or highly negative economic readings could send the dollar higher. In the short term, we can expect the dollar index to pull back on better than expected economic readings which may ease fears in the EU and the UK while worse than expected readings and/or hawkish Fed statement will send the dollar higher against all but the yen. Key support level for the DXY remains at 79.50
Euro - Shelter from the Storm?
FT reported this weekend that a EU bailout for Greece was in the works. Details are still scarce but we should know more by tomorrow (Monday). A bailout for Greece may provide the euro brief reprieve but rallies expected to be shallow and capped at 1.3850-1.4000. Obviously any bailout from Germany will be contingent upon austerity measures which have already stirred massive strikes and demonstrations across Greece. Euro sentiment remains bearish and the high probability trades would be to short the euro against the US dollar at key resistance levels (1.3850, 1.4000)
GBP -
The worst performing major currency seems to be priced for a worst case scenario. As such, it will not be surprising to see the pound staging a little bounce - especially if we get a dovish Fed statement. GBPUSD could be a good long if it comes back to test 1.4880 or on a break above 1.5230. Just like the euro, GBP sentiment is still bearish and rallies are likely to meet renewed selling pressure. 1.5550, 1.5350, and 1.5200 look like decent levels to short GBPUSD
Yen - Deja Vu All Over Again
Last week we noted our expectation for the yen to weaken against the strong aussie and loonie. That scenario played out nicely. Surprisingly, the yen decline vs. the US dollar was a lot milder as USDJPY finished the week only slightly up. Also, we noted surprising net-long positions among the Commercials both in the recent COT report and last week's. This could be reflecting expectations for temporary yen strength due to repatriation or a bet on a risk aversion sentiment. Whatever the case may be, going long yen may be perilous. Japanese officials already made commented on the yen's recent strength. Any hints of intervention may be enough to cause temporary but sharp declines in the yen.
And the Oscar Goes to....the Loonie!
The Canadian dollar finished another impressive week with gains across the board. Similar to the Aussie, the Canadian dollar has enjoyed the surge in commodity prices (namely, gold and oil). But unlike Australia, Canada's interest rates have yet to be tightened. In addition, further Chinese tightening are perceived to pose greater risk to Australia than to Canada. USDCAD broke a major support last week (1.0200) and is well on its way for parity, its next resistance level.
1. Greece bailout and FOMC statement to set the tone for the week - hawkish "surprises" will set the stage for stronger dollar and pullback in risk appetite.
2. S&P500 at major resistance level. Break above 1150 expected to be capped at 1166. The more likely scenario, is sideways consolidation or a pullback to key support (1130, 1112).
3. Expect a limited euro rally but capped at 1.3850 or 1.4000.
4. GPB priced in for a worst case scenario - as such, counter-trend bounce should not surprise but capped at 1.5550
5. Japanese hints of intervention and easing concerns over Greece, should keep yen on the decline. Any yen rallies should be limited.
6. Canadian dollar set for another swing at parity with USD.
----------------------------------------------------------
Beware the Ides of March
OK - clearly not the most original headline for a blog post on March 14 but a fitting one nonetheless. As we enter the second half of March, we find the Market in a precarious position and the bulls and the bears at an impasse. This time last year was fortuitous for market participants holding long positions in stocks and high yielding bonds and currencies. After a seven month free-fall, the downside risk was limited, if only by the end-of-the-world sentiment that was baked into cake. When perception changed and market participants realized the end of the world was not quite ready to manifest itself, a dramatic rally in "risky" assets ensued fueled further by massive, unprecedented amounts of cheap money pumped into the global economy.
But after twelve months of remarkable gains, the stock market rally is more mature and its momentum has waned due to lingering concerns over sovereign debt, commercial RE, tentative consumer demand, the eventuality of monetary tightening and the uncertain consequences of central banks' exit strategies. Clearly, this year the risk is more to the downside or, at least some sideways consolidation. Even a breakout above 1150 is no guarantee for extended rally. In fact, strong resistance zones loom just above the 1150 level. And 1225 is a major resistance zone marking a confluence of technical analysis elements (resistance lines, 68.8% Fibonacci retracement level, major moving averages). The combination of technical resistance and questionable fundamentals will no doubt keep risk appetite at bay.
Whether or not we will see the S&P break decisively above 1150 is impossible to predict. However, it is safe to assume that a major move will not take place prior to the FOMC statement on Tuesday. From the data we have, we can expect a more hawkish remarks that may spook the market. We will find out if others at the Fed adopted Mr. Hoenig's hawkish views. Actually, we should expect some hawkish "surprise".
Of course, hawkish remarks from the Fed could be interpreted as a sign of strength and a validation of the recovery - but this is the least likely scenario. Over the past months one could have observed on numerous occasions the close link between the risk trade and loose monetary policies. So where does that leave us?
S&P 500 - The Trend is Your Friend (until it ends)
To get a better understanding, we must zoom out and look at the bigger picture. First, let's look at the weekly chart. Despite a slight negative divergence with the RSI, the chart still looks bullish and a break above 1150 is still within reach.
But what if we break above 1150? For that answer, we must look back to September 2008, the last time the S&P held such lofty levels. We can see from the chart below (the image is spliced to fit the screen) that the real supply zone looms at the 1166 level - the origin of a huge move down. 1166 is as critical (if not more) as 1150 and we are only a few points away.
Bottom line, the S&P is still in "the mouth of the dragon" with sideways consolidation and/or limited pullback to key support areas (1130, 1112)being the most likely scenario. Any upward moves are likely to be capped at 1166.
USD - Time to Move
As expected, the DXY pulled back slightly, stopping just shy of our 79.50 target. After 34 days of sideways consolidation, we can expect the dollar to choose a clear direction. The dollar index COT graphs reveal sustained elevated levels of net long positions. This is inline with the sustained extreme net-short positions for the euro and GBP. In recent weeks, we referred to the USD as win-win on the notion that both highly positive or highly negative economic readings could send the dollar higher. In the short term, we can expect the dollar index to pull back on better than expected economic readings which may ease fears in the EU and the UK while worse than expected readings and/or hawkish Fed statement will send the dollar higher against all but the yen. Key support level for the DXY remains at 79.50
Euro - Shelter from the Storm?
FT reported this weekend that a EU bailout for Greece was in the works. Details are still scarce but we should know more by tomorrow (Monday). A bailout for Greece may provide the euro brief reprieve but rallies expected to be shallow and capped at 1.3850-1.4000. Obviously any bailout from Germany will be contingent upon austerity measures which have already stirred massive strikes and demonstrations across Greece. Euro sentiment remains bearish and the high probability trades would be to short the euro against the US dollar at key resistance levels (1.3850, 1.4000)
GBP -
The worst performing major currency seems to be priced for a worst case scenario. As such, it will not be surprising to see the pound staging a little bounce - especially if we get a dovish Fed statement. GBPUSD could be a good long if it comes back to test 1.4880 or on a break above 1.5230. Just like the euro, GBP sentiment is still bearish and rallies are likely to meet renewed selling pressure. 1.5550, 1.5350, and 1.5200 look like decent levels to short GBPUSD
Yen - Deja Vu All Over Again
Last week we noted our expectation for the yen to weaken against the strong aussie and loonie. That scenario played out nicely. Surprisingly, the yen decline vs. the US dollar was a lot milder as USDJPY finished the week only slightly up. Also, we noted surprising net-long positions among the Commercials both in the recent COT report and last week's. This could be reflecting expectations for temporary yen strength due to repatriation or a bet on a risk aversion sentiment. Whatever the case may be, going long yen may be perilous. Japanese officials already made commented on the yen's recent strength. Any hints of intervention may be enough to cause temporary but sharp declines in the yen.
And the Oscar Goes to....the Loonie!
The Canadian dollar finished another impressive week with gains across the board. Similar to the Aussie, the Canadian dollar has enjoyed the surge in commodity prices (namely, gold and oil). But unlike Australia, Canada's interest rates have yet to be tightened. In addition, further Chinese tightening are perceived to pose greater risk to Australia than to Canada. USDCAD broke a major support last week (1.0200) and is well on its way for parity, its next resistance level.
Saturday, March 13, 2010
Commitment of Traders (COT) Reports - 03/09/10
New Commitment of Traders (COT) graphs. This is the March 12 report (data as of Tuesday, March 9). Graphs display net positions for Commercials, non-Commercials, and non-Reportable traders.
Little changed since last weeks reports so we'll keep comments short. Strong net-long position are still evident in the S&P500 report as well as the dollar index, while the GBP and euro are still at extreme net-short positions.
The aussie dollar and the loonie are still gathering strength as speculators added to their net long positions - now at extreme levels.
Perhaps the only surprise this week is the Japanese yen COT report. It shows and increased net-long position which is quite contrary to what we'd expect.
CLICK ON THE GRAPHS TO ENLARGE
S&P 500 (e-mini) COT Report
US Dollar Index (DXY) COT Report
Australian Dollar (AUD) COT Report
Canadian Dollar (CAD) COT Report
Japanese Yen (JPY) COT Report
Little changed since last weeks reports so we'll keep comments short. Strong net-long position are still evident in the S&P500 report as well as the dollar index, while the GBP and euro are still at extreme net-short positions.
The aussie dollar and the loonie are still gathering strength as speculators added to their net long positions - now at extreme levels.
Perhaps the only surprise this week is the Japanese yen COT report. It shows and increased net-long position which is quite contrary to what we'd expect.
CLICK ON THE GRAPHS TO ENLARGE
S&P 500 (e-mini) COT Report
US Dollar Index (DXY) COT Report
Euro COT Report
British Pound (GBP) COT Report
Canadian Dollar (CAD) COT Report
Japanese Yen (JPY) COT Report
Thursday, March 11, 2010
Another Wild Card Friday
Unemployment numbers released this morning came in worse than expected and the market did what? you guessed it....it went up! In a mysterious manner, less than positive news somehow have a calming affect over the markets as fear abates and risk trade is back on. The S&P500 stopped dead in its tracks at the 1150 level. But other indexes like the Nasdaq, Russell 2000, Dow Jones Transportation, to name a few have already extended gains beyond their January highs. Lagging behind are the financials. Banks are among the most vulnerable with respect to exposure to sovereign debt. Although the situation in Greece seems slightly better now, the country is still faced with wide spread strikes and demonstrations, with some violent outbursts. The sustained demonstrations call into question the eventual success of the Greek austerity plan and remind us that market sentiment is fragile at best.
Friday's retail numbers and consumer confidence report will be key. If the risk trade is to sustain its momentum, it will need some better economic readings than what we've been seeing lately. The uptrend is decisively strong, and a break above 1150 will most likely occur with a gap up from today's close. Lousy retail numbers, however, are likely to dampen the flames. Because even if Greece's problems become completely contained, lack of consumer participation is still a major drag.
As expected, the US dollar has been consolidating and slightly pulling back on the backdrop of mild economic readings. As we've mentioned, the dollar is a win-win if we see either very strong readings or very bad readings - mild economic readings are the dollar's kryptonite. Still, any DXY pullbacks are expected to be shallow since both the euro and the GBP remain largely under pressure.
As fear dissipated from the markets, the yen has receded considerably, a trend likely to continue over the next few days.
Friday's retail numbers and consumer confidence report will be key. If the risk trade is to sustain its momentum, it will need some better economic readings than what we've been seeing lately. The uptrend is decisively strong, and a break above 1150 will most likely occur with a gap up from today's close. Lousy retail numbers, however, are likely to dampen the flames. Because even if Greece's problems become completely contained, lack of consumer participation is still a major drag.
As expected, the US dollar has been consolidating and slightly pulling back on the backdrop of mild economic readings. As we've mentioned, the dollar is a win-win if we see either very strong readings or very bad readings - mild economic readings are the dollar's kryptonite. Still, any DXY pullbacks are expected to be shallow since both the euro and the GBP remain largely under pressure.
As fear dissipated from the markets, the yen has receded considerably, a trend likely to continue over the next few days.
Unemployment Figures Fail to Impress
Unemployment claims diminished by 6000 since last week's reading but the number was still worse than expected. The mild improvement was not enough to impress, sending futures on the S&P lower and the yen higher. The S&P is still in a precarious position both technically and fundamentally and reflects disequilibrium between forward looking optimism and lower interest rates on the one hand, and meek economic readings coupled with a wide array of lingering concerns on the other.
Still, if the S&P manages to push higher in the face of such news, that would be a bullish sign and, contrary to reason, may be just the catalyst to send the S&P above its 1150 resistance.
Still, if the S&P manages to push higher in the face of such news, that would be a bullish sign and, contrary to reason, may be just the catalyst to send the S&P above its 1150 resistance.
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