Monday, August 31, 2009

How to Maximize Profits from the Coming Crude Oil Pullback


Crude has been a great instrument to trade, because it often amplifies movements in global stocks and other risk asset markets. With global stocks and other risk assets already pricing in a recovery, and likely overpriced, they are ripe for a pullback. Like many pullbacks during a long term bear market, the coming one could easily be well over 10%.

Trading crude oil has often been one of the best ways to play a strong trend, since it often amplifies movements in global markets.

Often one of the best ways to play crude oil movements is by trading Contracts for Difference, an instrument frequently unknown to retail investors.

The Best Way to Trade Crude Oil—Contracts for Difference (CFDs)

Oil ETFs may be easy to trade, but they don't always give you the full benefit of crude oil's movements.

Here's an easy, highly liquid way to trade AND capture the full movement in crude oil price swings—via Contracts For Difference (CFDs). Not widely used by the most popular online brokerages, these instruments allow traders capture the full movement.

What is a CFD?
A CFD, or Contracts for Difference, is a financial instrument similar to an index or share which allows you to trade an underlying index, share or commodity contract without having to own the underlying asset itself.

The CFD price is the same as the price of the underlying asset (whether it is a share, index, or commodity futures contract). If the price of the underlying asset goes up, so will the price of the CFD. A major benefit over ETFs or stocks is that there are no exchange fees and many of the inefficiencies of trading the underlying shares on the exchange are eliminated.

Note the following example of trading oil via the popular USO ETF vs. trading with contracts for difference

Example: Gain from Trading Crude Oil via CFDs, 2/12/09—6/29/2009

Note how a trader captures the full price movement. Dates Chosen did not capture the full movement in crude during since the beginning of 2009, in order to simulate what a savvy but not overly luck or prophetic trader might have done.

Trading with CFDs

February 12 Crude Oil Price $33.55

Chart Courtesy of AVAFX

June 29 Price $73.36

Chart Courtesy of AVAFX

Gain with CFDs

June 29 high 73.36
Less: February 12 low (33.55)
Difference 39.81

Percent Gain: 39.81/33.55= 118.65% Gain

By trading oil using CFDs, a trader buying and selling at these dates (neither of which is the high or low of the whole move) would have captured the full gain that crude made during the trade.

Trading with the Popular Crude Oil ETF, USO

With USO, a trader would barely have gotten less than a 48% gain, barely 40% of the profit using CFDs.

Feb 12, 2009 USO Price $26.13

June 29, 2009 Price $38.67

Gain with the Crude Oil ETF, USO

June 29 high 38.67
Less: February 12 low (26.13)
Difference 12.54

Percent Gain: 12.54/38.67= 47.99%
Comparing Gains with CFDs vs. USO

47.99/118.65 = 40.44%

In sum:
During the trade period of February 12—June 29 2009:
USO produces barely 40% of the full move in crude
CFDs give 100% of the gain over the same period.

Additional Benefits of CFDs

The brokers (online and offline) allow you to use the power of leverage which is often not available in equity products. For example, 50:1 leverage lets you control $50K of crude with just $1000. That can amplify both profits and losses by 50 times, basic risk management is even more essential than with other kinds of trading if one uses leverage. For example:

--Always plan your trades in advance, and decide what will be your entry and exit points, including using stop loss orders to control the maximum likely loss in a given trade

--Never commit more than a predetermined percentage of your capital to a given trade

Many of these brokers charge no fees or commissions, making their money as market makers, on the difference on the spread (the difference between the bid and ask price). Thus it's critical to be aware of the spreads your broker is giving, as well as any other fees involved.

Researching the Right CFD Broker For You

Typically one trades CFDs through brokers that deal in forex, commodities, and stock index trading. For individual "retail" traders, most of these are found online.

As with any other broker or professional service relationship, traders must do their homework. Brokers come in different styles and flavors. Some focus on large institutions or high net worth individuals. Others, like AVAFX, focus on more mainstream individual investors with less background. Even within that niche, there are many, and each broker tries to occupy a specific niche by offering certain specialties or advantages over others. These can be in variety of instruments offered, costs, level of service, ease of use, multi-lingual support, etc.

Unfortunately, I've yet to find an objective AND informed clearinghouse for information comparing the various online brokers. Most have a chat room online forum feel, so it's hard to feel confident about the information given.

I'd be grateful for any recommendations of online sites that make a serious effort at evaluating online forex/commodity/stock index trading sites.

Disclosure and Disclaimer: The author is Chief Analyst for AVAFX, an online forex, commodity, and stock index trading site, and makes no specific broker recommendations herein.


- Friday stocks: Asia mixed, Europe, US up on low volume. Monday morning Asia down on fears of Chinese credit cutbacks.
- Most risk assets following US stocks: Friday- up slightly Early Monday-dropping, Last Week-Tight trading ranges
- Lots of data this week: numerous PMI, central bank, confidence, employment data. US Non Farms Payroll data the likely climax


Weekly Recap - Week ending 28-Aug-09The stock market logged another winning week -- albeit a slight one -- as a solid gain in financials was offset by losses in six of the ten economic sectors. Overall it was a relatively slow news week with very few earnings reports, though participants did have some economic and banking data to digest.

In the end, the S&P 500 rose 0.3%, hitting fresh highs for 2009. The financial sector led the way, advancing 0.7%, followed by the tech sector (+0.3%) which benefited from better-than-expected earnings and guidance from two bellwethers. Defensive sectors underperformed, with utilities shedding 0.7% and health care giving up 0.9%.
Economic data was mostly better-than-expected, though it failed to provide a sustainable lift for the market. Housing was in focus with two more reports coming out ahead of estimates, though from depressed levels.

New home sales for July rose at a 9.6% annualized rate to 433,000 units, which is well above the 390,000 that had been expected -- the sharpest percent rise since 2005. That helped bring inventory down to a 7.5 month supply from an 8.5 month supply. The new home sales increase comes on the heels of multiple positive reports in the housing market, signaling that the bottoming of the housing market may be near. The Case-Shiller 20-city home price index rose on a month-month basis, and the year-over-year drop impred to 15.4%. This was better than the 16.4% year-over-year drop that economists had forecasted.

The preliminary Q2 GDP reading was unchanged from the advance reading at a 1.0% annualized decline, better than the 1.5% drop that was expected. The reading benefited from a smaller-than-expected drop in consumer spending.

The latest weekly jobless claims data continue to reflect a challenging employment environment. There were 570,000 new unemployment claims, down 10,000 from the previous week but slightly higher than expectations. Continuing claims fell by 121,000 to 6.133 million. However, the downward trend of continuing claims should not be confused with a strengthening of the labor market. Jobs are not plentiful and the drop-off is due to workers losing their unemployment benefits.

August consumer confidence rose to 54.1 from 47.4, which was well above the 47.9 consumer confidence. Likewise, the revised University of Michigan consumer sentiment survey for august came in at 65.7, ahead of the 64.3 consensus.

Finally, the June personal income and spending report illustrated the weak economic conditions. Income was flat after falling 1.1% in June, worse then the expected rise of 0.1%. Meanwhile, real personal spending rose 0.2%, in-line with expectation. The gain was primarily due to the jump in auto sales due to the Cash for Clunkers package.

Nikkei hits 11 month high on post election sentiment, short covering, strong output data, but drops near close.
China, HK shares closing down, ending rough August on fears of Chinese credit tightening.
In sum, Asian markets headed lower Monday, with Chinese shares tumbling over 5 percent and Japanese stocks fluctuating after the country's opposition party came to power in a landslide victory.

Global Stock Market Results Friday, Monday Morning

COMMODITIES: price risk ahead appears tilted to the upside, especially in industrial metals and energy. This is because these two groups of products are closely linked to industrial production and economic growth

Oil: prices fell to near $72 a barrel Monday in Asia as China's stock market tumbled and commodities investors questioned whether the U.S. economy can recover strongly in the second half.

Tumbling Asian stock markets, led by a 5.4 percent fall in China's benchmark, provided a negative cue for crude. Oil investors often look to stock markets as a barometer of sentiment about the economy.

Oil has traded near $70 a barrel for most of the last few months as investors struggle to gauge how robust the U.S. recovery will be. Crude has tried and failed several times, including last week, to break through the $75 level.

"Oil looks a little tired," said Christoffer Moltke-Leth, head of sales for Saxo Capital Markets in Singapore. "We're seeing an economic recovery, but that's already been built into the price."

The U.S. economy will likely have to grow at least 2 percent in the third quarter to enthuse traders and push the oil price past $75, Moltke-Leth said.

Investors will be eyeing the U.S. unemployment report on Friday as a key indicator of the economy's health. A high unemployment rate this year has undermined consumer confidence and hurt crude demand.

Oil could drift lower to near $65 a barrel during the next month on investor concerns the current economic recovery isn't sustainable, Moltke-Leth said.

"We could see another dip next year when the fiscal stimulus starts to fade," he said. "The consumer is still being careful."

Gold :held steady near $955 an ounce on Monday on a weaker dollar and firm oil prices, after retreating from an earlier peak near a three-week high marked late last week. Trading has largely been confined to a range of $930 to $960 during the past three months, with gold pressured by a resurgent dollar but underpinned by inflation worries and uncertainty about the economy.

"$960 is the resistance level we have been seeing since the latter half of August, and gold remains technically vulnerable around that level," said Shuji Sugata, a manager at Tokyo's Mitsubishi Corporation Futures & Securities.

Currencies: The Yen supplied a strong start for this busy week, with significant gains following the general elections. Canadian GDP and European CPI Flash Estimate are the highlights of today. [SEE WEEKLY PREVIEW FOR FULL DETAILS]

Japan's watershed election over the weekend is followed by a UK bank holiday today. On the data front we have the August PMI numbers - including the closely watched Chinese manufacturing PMI on Tuesday - around the middle of the week and the important US non- farm payrolls due on Friday. In between, there's the ECB meeting, and the week will end with the long Labour Day weekend in the US.
The Democratic Party of Japan has won the election, unseating the long-standing LDP government with a landslide victory amassing around 320 lower house seats and relegating the LDP to around 100 seats. The questions that lingers now is if the DPJ could deliver their lofty election promises and what the results means for Japan's policies, including foreign relations and FX policies.

The G20 finance ministers are meeting on September 4-5, ahead of the G20 summit September 24-25. Secretary Geithner is scheduled to attend.

Officials from China's sovereign wealth fund manager CIC revealed over the weekend that it invested only $4.6bn in foreign assets last year, while holding most of its investment in cash. They have however picked up the pace, investing around that amount every month this year, reinvesting the profits they have generated domestically and at the same time recycling some off the large current account surpluses through capital outflows. Significantly US assets are not off the radar despite the concerns over the USD.

USD - USD recovers Friday on Univ. of Michigan confidence numbers. We expect improvements across the ISM and PMI releases Monday & Tuesday, and look for any further details on the future of the mortgage purchase program and other stimulus from Wednesdays' Fed minutes, crude inventories and ADP payroll will provide further hints as markets await Friday's change in non farm payrolls, forecasted to beat last month's -247K with a reading between -215 to 223K.

EUR - In the Eurozone, the key event will be the interest rate decision on Thursday. Most believe the 1% rate will remain. The EUR/USD was unchanged over last week, trading in a tight range. Local news likely to be overwhelmed by overall risk sentiment, especially from the US news, climaxing in the US Non Farms Payrolls change data on Friday.

European CPI Flash Estimate is expected to drop in an annually adjusted rate of 0.4%, less than last month’s fall. Deflation is hurting EUR/USD. Signs of hope in this field were seen last week in the German Prelim CPI.
Otherwise, CPI is expected to improve slightly to -0.3%y/y from -0.6% previously, easing further deflation fears in the currency union. Eurozone GDP is also expected to be confirmed at -0.1%y/y for a -4.7% annualized print. Germany will release manufacturing PMI, which may edge close to the 50 level.

We expect the EUR to remain under pressure should risk appetite turn.

JPY - The yen hit a seven-week peak against the dollar on Monday as short-term players chased it higher following a thumping win for the opposition Democratic Party in Japan's election, breaking chart supports for the greenback. The yen edged up after the landslide election victory on Sunday, and then gathered pace as automatic dollar sell orders were triggered close to 93.00 yen per dollar, "Shanghai being down 5 percent has muddied the picture as well as to whether it's a reaction to the election victory or risk aversion. It's probably a bit of a combination of both." traders said.

Falling Chinese shares also prompted investors to buy the yen and sell other currencies perceived as risky, including higher-yielding Australian dollar.

"There were a few stale longs liquidated this morning, with dollar/yen and euro/yen selling," said a senior trader at a European bank in Hong Kong.
The opposition DPJ Party won about 75% of the Lower House seats. The USD/JPY could be hurt if the DPJ acts on its intentions to increase government spending and debt (could increase JPY interest rates) and to reduce US bond purchases.

Japan’s Prelim Industrial Production surprised and rose by 1.8% instead of 1.4% that was expected. Also Retail Sales did well and fell by “only” 2.5%, less than 3.3% that was expected.

Later in Japan, Average Cash Earnings are predicted to fall by 6.3%. BOJ Governor Masaaki Shirakawa will talk later on, very close to the release of election results. Japan’s opposition won a landslide victory over the ruling party. The Japanese Yen is now rallying - USD/JPY now trades at 91.59.

CHF – Tuesday's GDP, and PMI data are the main events for the week. Likely to benefit from stocks pullback, though it progressed against most majors this past week. USD/CHF at bottom of 3 month range. Long term bias appears up, but could play either direction short term.

Swiss National Bank will continue its expansionary policy and will stick to unconventional measures. Interest rates will remain low and the Bank will continue to prevent gains in the CHF. There is caution on the economic outlook as unemployment could increase to 6% on average in 2010.

AUD - US & Global stock news likely to overwhelm local news, since this has been trading mostly on risk sentiment.The RBA decision and Q2 GDP are due on Tuesday and Wednesday respectively. Among other releases, building approvals due on Tuesday are likely to show further improvement while the trade deficit is expected to widen.

Our economists believe broad-based resilience across various components means that another positive print is likely for Q2 GDP and forecast 0.5% q/q, with the risks lying to the upside.

The cash rate will likely be left on-hold, but the RBA's statement will be closely watched for any hints that the RBA is eyeing a pre-Christmas rate hike.

NZD – Like the AUD, US & Global stock news likely to overwhelm local news, since this has been trading mostly on risk sentiment Monday's NBNZ Business Confidence is the main NZD news this week, 34.2 expected vs. 18.7 prior.

CAD - Better than expected Retail Sales helped the loonie advance below 1.08, but the break was false, under the low forex volume in summer. This week’s events are scattered unevenly, but are very important:. These include: Monday: GDP, Friday: Employment Change, Unemployment Rate, Ivey PMI. American releases will dominate USD/CAD during Tuesday, Wednesday and Thursday, when nothing is released from Canada.

The pair will shake during Friday, when both countries release the all-important employment figures.

Summary: Stocks continue to focus on positive, pulling other risk assets along, but with a weak recovery already priced in, many believe the next significant move may be down as asset prices appear high relative to growth prospects over the coming year. Low stock market trading volume suggests that the big money does not believe risk assets are a good value.
WHY: Willingness to focus on positive, downplay much existing negative news.

Trading Opportunities: 1. Be prepared to play a pullback in risk assets by selling stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops. Always use sell stop orders.

Over the longer term Be cautious about the rebound in global asset markets and keep risk-averse bias: i.e. be ready to go long USD, JPY, CHF against other majors, short risk currencies, stock indexes, and commodities. Thus those holding safe haven assets like USD are likely to get better levels to sell later in the year. Also, keep in mind that at least for the next year or so, the US will not likely be alone in running sizable budget deficits ( When spending is greater than government income). Both the GDP and JPY also have heavy debt burdens. For the US, Monitor employment and confidence because consumer spending makes up about 70 percent of U.S. economic activity. News this week could influence direction depending on the outcome so intraday investors want to watch fundamentals while monitoring technical aspects.

Today’s Major Calendar Events (GMT) * = Main Event


Sunday, August 30, 2009

Currency Trader’s Review/Forecast August 20-September 4: Part III— When Markets Reverse


GBP: Likely to Follow Trends in Risk Assets [stocks, commodities, AUD, NZD, CAD, EUR]

Outlook: Bearish

Summary of Past Week

- British Pound technical sell entry ahead if breaks below around 15960

- UK Consumer Confidence points to pessimism on economic conditions

- FX Sentiment points to British Pound losses against Japanese Yen

- Strong GBP correlation to risk assets could mean further declines if stocks pull in

Summary Table of Coming GBP Events



A lackluster week of British fundamental data made the Pound the worst performer among all G10 currencies through recent trade, and a technical break below multi-month trend line support leaves risks to the downside for the UK currency. Disappointments in GfK consumer confidence survey numbers and late-week international trade figures underlined risks to domestic consumption. A modestly positive revision to second quarter Gross Domestic Product figures failed to elicit a reaction from the UK currency, and it seems that markets had little interest in holding long-GBP exposure through illiquid trading conditions.

The week ahead should bring far more liquidity into the FX market, and it will be critical to watch the next GBPUSD moves as traders return to their desks for the first week of September.

Seasonality in global financial markets add further downside risks for the GBP, as stock markets often experience their worst month of the year through September. Indeed, the much-talked-about “September Effect” looms large on FX markets; a strong GBPUSD correlation to the US S&P 500 strongly suggests that the British Pound would lose on S&P declines. Past trends hardly guarantee future results, but we cannot ignore fairly clear seasonal tendencies. Second-tier UK economic event risk may provide some surprises, but we expect that broader financial market risk sentiment will provide the strongest influence on the risk-correlated British Pound.

Thus GBP traders should be especially alert when Friday’s US Non-farm payrolls data comes out. However, beware that the initial market reaction to NFP often reverses within the first hours.

Coming GBP Economic Events

Traders should keep an eye out for noteworthy results in upcoming Purchasing Managers Index (PMI) Manufacturing, Construction, and Services reports; the surveys are typically leading indicators for economic growth trends. All three surveys are expected to improve on the month of August. High expectations certainly leave room for disappointment and, if anything, risks remain to the downside ahead of PMI data.

Again, forex traders will keep a very close eye on end-of-week US Nonfarm Payrolls data. The infamous NFP’s report often sparks impressive, if unpredictable, moves in the US S&P 500 and US Dollar. Needless to say, any particularly sizeable surprises in the data could provide substantial GBPUSD volatility.

CHF: Likely to Follow Risk Trends to Reversal or Breakout

Outlook: Bearish

Summary of Past Week

- KOF’s leading forecast for growth is more optimistic than economists’ expectations for 2Q GDP

- German 2Q consumption and capital expenditures improve more than expected, boosting trade prospects

- USDCHF is skidding at the bottom of its well-worn range. Will the pair break or rebound?

Summary Table of Coming CHF Events



The Swiss franc has seen bullish progression against most of its pairings this week. However, the few crosses that did not follow the beaten path highlight the primary fundamental drivers that surrounding the currency heading into the new week. The most prominent dissenter was CHFJPY, which weighs in on the most pressing theme underlying the franc’s progress today: risk appetite. It is this unpredictable, speculative force that has left the USDCHF locked in a 400 point range for the past three months and led broader market sentiment to flag over the past few weeks.

Turning from the yen cross to the euro pairing, our focus adjusts from speculation to fundamentals. Measured against its largest trade partner, Switzerland is so far trailing the global recovery; and the lasting damage through a somewhat protectionist agenda and the slow degradation of its banking systems legendary privacy could permanently alter the CHF’s place in the currency world.
There are deep economic shifts potentially underway and the franc is slowly losing its status as a safe haven currency; but for the immediate future, risk appetite remains the primary catalyst for direction and volatility. Through this past week, it seemed that the market was falling into a lull with liquidity thinning out for the summer.

However, the congestion and stalled trends that overwhelmed our charts is more likely a ‘calm before the storm’ scenario. The gap between fundamentals and investment activities is growing ever wider; and this reality is working its way more surely into the general consensus. To sustain a rally that is fueled by capital gains, sidelined money must continuously flow into the speculative arena. However, volume behind equities, commodities and other transparent markets shows conviction behind an ongoing bull run is flagging.

Switzerland depends on the health of the region to consume its exports. However, with the market appreciation of the franc over the past months and years, we will see a lack of demand is severely complicated by an unfavorable exchange rate that will no doubt delay a recovery that is finding woefully little support domestically.
On the topic of trade and the exchange rate, it is important to always monitor the Swissie’s place in the FX market. The sanctity of the its safe haven status is particularly important to how the market responds to the currency. The SNBs efforts at intervention produce an unwanted sense of volatility – something particularly unwelcome for a carry candidate. Going one step further, it is also considered a protectionist measure at a time when policy officials are trying to avoid such steps to facilitate a global recovery. This could isolate and perhaps further damage the currency’s reputation.

But the most concerning potential loss is the absolute privacy of the nation’s banking system. After the US successfully lobbied the government for records on American accounts, the term ‘Swiss Bank Account’ seems tarnished.

Coming CHF Economic Events

A dense round of data from the broader economic docket may spark a reconciliation between sentiment and economics. The interest rate decisions on deck (ECB and RBA) will likely show that even the most hawkish policy group is holding off on its definitive turn to rate hike. The influence of economic recovery forecasts will be in full swing. With GDP reports (Euro Zone, Australian and Canadian) and employment data (German, US and Canadian), it will be made more evident that a recovery from recession doesn’t mean we are heading straight into a strong period of expansion. The longer it takes the markets to adjust to the fact, the more dramatic the response.

It is true that risk trends hold the greatest potential for influence over the franc; but the economic docket will market its own impact through domestic channels. Top event risk is the reading of second quarter GDP. Unlike its Euro Zone counterpart, this is the first reading for Switzerland. Also, unlike its main-land peer, the Swiss economy is expected to have plunged deeper into recession through the three month period ending June. Both the forecast for a 1.0 percent contraction through the quarter and 3.0 percent pace of decline over the year would be the worst on records going back to 1980.

CAD: Pressed By Sentiment, BoC Intervention Threats, Weakening Growth

Outlook: Bearish

Summary of Prior Week

- Canadian retail sales rose 1.0% versus expectations of 0.1%

- Canada reported a record current account deficit of C$11.2 billion

Summary Table of Key CHF Events



The Canadian dollar was under pressure for the majority of the week but managed to erase some of its losses as risk appetite and oil prices found support at the tail end. The CAD started the week on a positive note with June retail sales posting a 1.0% gain versus expectations of 0.1%, before fears over a limited global recovery sunk the demand for risky assets and the local currency. It was the fifth gain in six months led by a 4.7% increase in gasoline receipts. However, the second quarter current account dampened the outlook for growth as the export driven economy saw its deficit widen to a record C$11.2 billion. A C$9.3 billion drop in exports outpaced imports and led to the first traded goods deficit since 1976. The collapse in trade should lead to continued pressure on manufacturers to cut costs which will add to weakness in the labor market.

Coming CAD Events

Next week’s employment report is expected to show a rise to 8.8% in unemployment from 8.6% which would be the highest level since January, 1998. The economy is expected to have lost jobs for the ninth time in the last ten months with economists predicting a loss of 20,000 more in August.

The still declining labor market combined with sinking demand for exports will dim the outlook for domestic growth and could sink the “loonie”. However, we could see bullish Canadian dollar sentiment early in the week from the GDP report which is expected to show a 0.2% rise in June which would be the first monthly gain since July, 2008. The quarterly reading is also expected to improve to -3.0% from -5.4% as the recession shows signs of slowing. An expected improvement in the Ivey PMI manufacturing index to 54.0 from 51.8 could add to “loonie” support as the increase in activity may necessitate the hiring of new workers. 

The manufacturing sector has seen job losses steadily decline and if an expansion in the sector leads to job creation then we could see the outlook for the economy brighten. Nevertheless, job creation has been the biggest concern and another month of losses may be too much for “loonie” bulls to overcome. The USDCAD appears to be carving out a range between 1.0700-1.1100 and the tug of war between signs of a recovery and limited expectations of future growth could lead to sideways price action throughout the upcoming week

AUD: Q2 GDP, RBA Interest Rate Policy Coming, But Sentiment Could Overwhelm These

Outlook: Bullish

Summary of Prior Week

- Australian Skill Vacancies rise for the first time since October 2007

- Australian 2Q Capital Expenditures Unexpectedly Increase

- Currency Market Bull Trend Stalling as Growth Forecast and Financial Stability Lose Traction

- AUD likely to be among the biggest losers if global risk appetite drops, carry trades unwind

Summary Table of Coming AUD Events




The Australian dollar continued to strengthen against is currency counterparts this week and is poised to mark its longest monthly winning streak since December 1989 as investors ramp up long-term expectations for higher borrowing in the $1T economy. Credit Suisse overnight index swaps are up 191bp in August after the Reserve Bank of Australia curbed speculation for further easing, and the interest rate outlook may continue to trend higher throughout the second half of the year as the central bank anticipates economic activity to expand at an annual rate of 0.5% this year.
However, China’s State Council announced plans to limit new lending and restrict overcapacity in major industries including steel and cement after pledging to increase capital requirements for banks earlier this month, and policy makers may take further steps to ‘guide the healthy development of industries’ as the economy stands at a ‘critical period.’ The shift in government policy spurred fears of a slower global recovery as the world’s third largest economy looks to scale back on consumption, and fading demands from China, Australia’s biggest trading partner, is likely to hamper the outlook for future policy as the RBA maintains a cautious tone. At the same time, stocks in Asia/Pacific slumped throughout the week, with the Shanghai Composite index posting is fourth consecutive weekly decline, and the rise in risk aversion could temper the rally in the AUD/USD as investors weigh the outlook for a sustainable recovery. At the same time, aussie-dollar forex options have shown market sentiment has been extreme for some time, and suggests a major pull back is underway as non-commercial futures traders remain net-long on the Australian dollar, and fears of a slower return to growth paired with the rise in risk aversion could weigh on the exchange rate in the month ahead.

Coming AUD Events

Nevertheless, a Bloomberg News survey shows all of the 17 economists polled forecast the Reserve Bank of Australia to hold the benchmark interest rate at the 49-year low of 3.00% next week as economic activity improves, and commentary following the rate decision may instill an enhanced outlook for future policy as the central bank is widely anticipated to maintain a neutral policy stance throughout the second-half of the year.

Moreover, market participants project economic activity to expand for the second consecutive quarter, with economists forecasting the annual rate of growth to increase 0.7% from the previous year, and the data may drive the exchange rate higher as growth prospects improve.

However, the trade deficit is projected to widen to 880M in July from -441M in the previous month, and the slump in global trade may weigh on the outlook for future growth as exports account for more than 20% of GDP.

NZD: Likely to Trade on Risk Trends, Not Data

Outlook: Bearish


- As long as markets continue to rise, so may the Kiwi, but if they fall, it could fall hard

- Trading with risk appetite, thus US news likely to be more influential than domestic news

- New Zealand Inflation Outlook Bolsters Case for Interest Rate Cuts

- Trade Deficit Narrows as New Zealand Imports Tumble in July

Summary Table of Key NZD Events



The New Zealand Dollar is likely to fall in with broad trends in risk appetite once again this week as traders look past a nearly empty economic calendar.

Coming NZD Events

While the domestic scheduled event risk is decidedly tame, the US calendar that so often serves to guide overall risk sentiment features an ample dose of market-moving releases. Most critically, the ISM survey is expected to show that manufacturing expanded for the first time since January 2008; the Fed is set to release minutes from their last policy meeting; and the all-important Non Farm Payrolls report is forecast to show the economy shed -225 jobs in August, the least in a year. If these prove to offer support to risky assets, the New Zealand Dollar will continue to advance, with a trade-weighted average of the currency’s value now 93.4% correlated with the MSCI World Stock Index.
That said, last week’s muted response to the better-than-expected US GDP revision for the second-quarter may be hinting that equities are finally feeling uneasy having reached the highest levels relative to earnings since late 2003. This make sense considering the kind of earnings and revenue growth that can be expected in a year that brings the first contraction in real global GDP since the Second World War. On balance, regardless of direction, traders are likely to continue to watch equity and commodity prices to set the Kiwi’s directional bias for the time being.

Conclusion & Suggestions

The overwhelming key point is that global risk asset markets appear overbought in light of actual growth prospects for the coming 12-24 months, and thus the next big move is likely to be down, not up. When sentiment shifts, news will be swept aside, as speculative positions in carry trades and commodities unwind, with the USD, JPY, and similar short positions against risk assets likely to be the major beneficiaries.

See Part I Conclusion for more.

Disclosure and Disclaimer: The opinions expressed herein are not necessarily those of AVA FX. The author holds positions in the above mentioned instruments.

Weekly Currency Traders’ Essential Review/ Forecast: August 30- September 4: Part II--USD, EUR, JPY

Revenge of the Nerds: Safe-Haven Currencies Poised to Rally? If This September Stays True to Form...

The Big Picture

Get ready! As noted in Part 1, this week will show an increase in significant news. We have GDP from Canada, Australia, Switzerland and Europe. There are rate decisions from Europe and Australia, Sweden and others. Employment data will come from Europe, Canada and the US including possibly the biggest event of the month: US Non-Farm Payrolls . Also, there are special events: general elections in Japan and the G20 meetings during the weekend.

Finally, with summer holidays over, there should be a return to higher, more normal trading volume. That should provide greater stability under normal conditions, but also allow potential for bigger spikes when truly market moving news hits. If nothing else fills that roll, look to this Friday’s US non-farms payroll report, considered the most important indicator of US employment, and thus one of the key measures of US and global economic health.

USD: Will Traditional September Pullback in Risk Assets Bring USD Rally?

Outlook: Bullish

Summary of Past Week’s Events

- Conference Board consumer confidence surprisingly surged to a 3-month high in August

- Despite revisions, the University of Michigan’s consumer confidence index fell slightly

- US durable goods orders up by the most in 2 years, but mostly from 1-time cash for clunkers

- S&P has LOST an average of 30 points in Sept. over the past 10 years . A bad month for stocks would likely boost USD demand as traders seek a safe haven at the expense of commodities and risk currencies [AUD, NZD, CAD, EUR]

- Extreme oversold USD, overbought risk assets situation is ripe for such a reversal, but could market resilience continue to overcome negative news?

Summary Table Key USD Events This Week



A consolidation week: ended the past week on a mixed note across the majors, losing against the New Zealand dollar, Australian dollar, and Japanese yen, but rising versus the Swiss franc, euro, Canadian dollar, and British pound. The US dollar index remains above a rising trend line connecting the July 2008 and August 2009 lows.

Trading conditions have been extremely difficult, even for those that thrive on range trading, as the low volumes so often associated with the summer create highly choppy price action, and this may remain the case throughout next week ahead of the US Labor Day holiday.

Main Events & Possible Results

There are a number of indicators due out over the next week that could trigger breakouts for the US dollar. However, unless there is something very surprising, a cautious bias in trading could likely take over from midweek ahead of the headline event-Non Farms Payroll data.

On Tuesday, the ISM manufacturing index is projected to rise above 50 – the point of neutrality – for the first time since January 2008, which would suggest that the sector is finally experiencing a legitimate recovery in business activity. If the US government’s recently ended “cash for clunkers” program has been the main driver of this improvement, then there could be a noticeable drop in output in coming months. In the near term, a strong ISM manufacturing reading might bode well for the US dollar, though beware of drops in the coming months unless the program is extended.

The main event risk for the US dollar on Wednesday will be the release of the minutes from the Federal Reserve’s last meeting on August 12. Following that meeting, the policy statement eventually led to a quick return to risk-taking that pushed the greenback lower, as the Federal Open Market Committee (FOMC) said that the current "policy actions…will contribute to a gradual resumption of sustainable economic growth" and that they had decided to gradually slow the pace of Treasury securities purchases. A reiteration of these statements has the potential to lift risk appetite further, but indications that FOMC members are feeling uneasy about the outlook for growth or the need to expand quantitative easing down the road could do quite the opposite.
On Thursday, ISM non-manufacturing is anticipated to rise to an 11-month high of 48.0 for the month of August from 46.4. While stronger readings are always a positive, anything below 50 will continue to signal a further contraction in activity and will ultimately highlight the lack of consumer spending growth in the US.
On Friday, the US non-farm payroll (NFP) report is forecasted to show job losses for the twentieth straight month in August, though the rate of decline is anticipated to slow further. Bloomberg News is currently calling for NFPs to decline by 227,000, which would be the smallest drop in a year. Meanwhile, the unemployment rate is projected to edge up to 9.5 percent from 9.4 percent, but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the sole reports that impacts the US dollar from a pure fundamental point of view.

EUR: Fresh 2009 Highs Possible If Data Supports End of Euro Zone Recession

Outlook: Neutral

Summary of Past Week’s Events

- Euro fails to hold gains despite fourth straight German IFO improvement

- German Consumer Price Index report boosts fears of deflation

- Consumer confidence data nonetheless boosts fundamental forecasts

- Pullback in risk assets could boost USD , drop EUR, which tends to trade in opposite direction

Summary Table of Key EUR Events



The Euro saw yet another week of incredibly choppy trade, finishing the week almost exactly unchanged despite surging near year-to-date highs against the US Dollar. The last week of summer trading produced brief moments of sharp price moves and uneventful price action at moments in between. Relatively wide bid/ask spreads on major currency pairs underlined that market conditions remained illiquid—making short-term currency forecasts all but impossible. We expect that market conditions will improve through the first week of September trading, and it will be important to watch whether the Euro and US Dollar embark on new trends to start the trading year.

Coming Main Economic Events

The vaunted “September effect” typically stipulates that stock markets typically fare worst through September, and a fall in risky assets would likely benefit the safe-haven US Dollar. In the past 10 years, the US S&P 500 has lost an average of approximately 30 points through September—by far its worst tally in any month of the year. Past performance is hardly a guarantee of future results, but it will nonetheless be important to watch for a turnaround in recently high-flying risky asset classes.

The very fact that the S&P 500 has set fresh year-to-date highs through end of week trade by itself helps set up a possible noteworthy pullback, and this may be one of the most important FX market themes in the week ahead. A busy week of European economic event risk likewise promises eventful price action through the coming days.
The combination of European and US employment figures could finally provide clear impetus for sustained Euro/US Dollar moves. German and EU officials report on regional unemployment on Tuesday the 1st of September—setting the tone for the subsequent month of fundamental data. Both are expected to show continued deterioration in unemployment rates and underline downside risks to economic growth. Subsequent Euro Zone Gross Domestic Product revisions are expected to show a modest downgrade to second quarter expansion numbers, but the true fireworks will likely come on the following day’s European Central Bank interest rate decision.
The ECB is very widely expected to leave interest rates unchanged—ostensibly leaving little risk for major volatility. Yet markets will be paying close attention to any shifts in rhetoric from the regional central bank. Officials will likewise release their new economic outlooks for the Euro Zone, and any surprises could likewise produce reactions in the Euro itself.
Finally, traders should keep a lookout for US Nonfarm Payroll results on Friday. Continued improvements in US employment numbers leave economists expecting a slowdown in job losses. Yet any surprises could easily cause substantial Euro/US dollar moves.

JPY: Like the USD, Ready to Benefit from a Drop in Risk Appetite.

Outlook: Bullish


- How long will risk appetite ignore fundamentals?

- Unemployment hits a record low through July, deferring the timing of an economic recovery

- Will the rest of the yen crosses follow GBPJPY’s plunge this past week?


While other majors’ economic calendars have a full week ahead, there are comparatively few Japanese economic indicators due for release next week. However, that doesn’t mean the yen will be relegated to tight ranges.

The light docket belies the heavy event risk that is looming for the single currency. This weekend, the nation will go to the polls to vote in the first general election since 2005. Such a political episode is always market moving; but the fundamental implications in this election run especially deep as the world’s second largest economy is struggles to recovery from its worst recession in history and opinion polls suggest a change in power (and therefore policy approach) may be in the cards. And, if this wasn’t enough for market participants to worry about, there is always the high correlation to market sentiment to worry about. Tight ranges and stalled rallies should concern rather than pacify the astute trader.

Main JPY Economic Events

First and foremost on the table is the general election that is to take place on Sunday the 30th. All 480 seats of the House of Representatives are open to the ballot – and for those unfamiliar with the Japanese political system, the house designates the Prime Minister. Clearly, there is at lot at stake from the traders stand point in this event risk. Whoever has control over the government will set vital policies that will steer the economy’s recovery from its worst recession since WWII. The uncertainty surrounding the event alone is enough to shake what confidence is still inherent in the yen. Even before the recent financial and economic crisis, Japan was mired in what is popularly coined a ‘lost decade’ of feeble growth, deflation, high savings and weak domestic investment trends.

What makes it even more interesting is that early opinion polls suggest the ruling coalition of the Liberal Democratic Party (LDP) will be unseated for the first time in nearly half a century by the opposition Democratic Party of Japan (DPJ). Admittedly, both their economic policy outlines are similar and spotty; but the desire to make an immediate impression and take control of the recession would likely see more immediate reaction should the DPJ win.

Beyond the immediate volatility following the market open after the election is decided, the outcome of this political shuffle will have a lasting impact on the Japanese economy and currency. Yet much of its influence will be subtle.

In contrast, general risk appetite trends could cause severe waves for the yen over the coming week. Over the past few weeks, bullish sentiment has stalled. The S&P 500 has stalled below 9,635; crude has failed to surmount $75/barrel; and carry trade has tested the same 10-month high through all of August. Either these markets will have to push through or retrace; and with the progress of these speculative markets, we will see sentiment unfold.

Supporting an ongoing bull wave, there is still immense amounts of side-lined capital that can find its way into the market. However, even if there is another leg of the now five month advance, it will likely be short-lived. Sentiment is waging a heavy premium over what fundamentals suggest the recovery can support and the lack of investment turn over can produce in returns.

See Part I & III for Continuation & Conclusions & Suggestions

Disclosure and Disclaimer: The opinions expressed herein are not necessarily those of AVA FX. The author holds positions in the above mentioned instruments.

Weekly Currency Traders’ Essential Forecast August 23-8 Part I: Key Events & Implications


This past Thursday saw something different, and possibly very significant—currency events influencing stocks. Specifically, a declining USD was seen as the main cause for a spike in oil prices, which in turn caused a spike in materials stocks in the US, which in turn sparked enough of a rally to lift US stocks higher despite lower results earlier in Asia and Europe.

Generally, stocks have lead currencies and commodities. Could we be seeing the start of a change in inter-market relationships, with stocks taking a less dominant role as a sinking dollar becomes more of a market moving influence of its own?

This week’s calendar is not only far busier, it should also see a spike in trading volume with the end of summer holidays. On the one hand that could minimize volatility from minor events, but on the other could mean greater movement on truly market moving news as the big volume traders get back to work.

Here’s a rundown of the key events and their possible implications.

Key Economic Events Each Day

SUNDAY August 3


Meaning: Opposition party expected to win a controlling majority for the first time since 1955. It favors taking on more debt, which could raise JPY interest rates. Short term uncertainty could weaken the Yen, but serious signs of rising rates would likely give it a short term boost.





  • Japan: Plenty of data to help clarify its economic health
  • Australia: No surprises expected
  • New Zealand: the NBNZ Confidence report tends to be a good gauge of the New Zealand economy and could impact the kiwi.
  • Canada: GDP is expected to return to growth, surprises in either direction could affect the CAD, US: same for the Chicago PMI and the USD





  • AUD: Australian Building Approvals and Current Account start the day. They will only serve as a prelude for the Australian Cash Rate, expected to remain at 3%. Fresh hints for future rate hikes might be supplied in the accompanying RBA Rate Statement.
  • CHF: Swiss GDP for the second quarter is predicted to stay in the red, with and expected contraction of 0.9%. Also note Swiss SVME PMI, a survey of about 200 purchasing managers, over 50 = expansion.
  • EUR: German Retail Sales are predicted to rise by 0.7% after falling last time. The more important release is the German Unemployment Change. This is important for the EUR/USD as well as for the upcoming elections in Germany this month. The all-European Unemployment Rate will also be of interest.
  • UK: After a bank holiday on Monday, British data starts on Tuesday, with Manufacturing PMI which is predicted to remain above the critical 50 level and even advance. Halifax HPI, the all-important housing figure will also be published this week, probably continuing to rise.
  • USD: ISM Manufacturing PMI is expected to cross the 50 mark. At the same time, Pending Home Sales are also expected to grow, following other housing figures.





  • AUD: Australian GDP, which has had only quarter of contraction in this crisis, is predicted to continue growing, this time by 0.6%.
  • GBP: British Construction PMI is another important housing figure. It’s predicted to remain below 50.
  • EUR: European Revised GDP is expected to confirm the small contraction at 0.1%. A surprising growth figure will definitely boost EUR/USD.
  • USD:
    • ADP Non-Farm Employment Change, the preliminary release for Friday’s Non-Farm Payrolls (NFP), is expected to show less job losses, at 250K. This isn’t always a good prediction for the NFP.
    • Dennis Lockhart, who said last week that the real unemployment rate in the US is 16%, will speak again today, and might shake the markets. More important news from the Fed will come with the FOMC Meeting Minutes. In their last meeting, the only news was that they were slowing the bond buying program, or spending fewer dollars.




  • AUD: Australia will start the day again, with Trade Balance which is expected to deepen.
  • GBP: British Services PMI is expected to remain above 50 for the fourth consecutive month.
  • EUR: European Retail Sales are predicted to turn positive this time, but the markets will be anticipating a bigger release from Europe.

Jean-Claude Trichet and co. will be releasing the new Minimum Bid Rate at 11:45 GMT. It’s predicted to remain at 1%. Hints about possible rate hikes aren’t expected at the ECB Press Conference, since Europe is suffering from deflation.

  • USD: American Unemployment Claims were very disappointing in the last weeks. They’re expected to edge upwards, giving us another minor prelude to the NFP.
  • ISM Non-Manufacturing PMI, the complementary figure for Tuesday’s ISM Manufacturing PMI is expected to remain under 50, still contracting. The road to recovery is narrow.





  • EUR: In the wake of the G20 meetings, Jean-Claude Trichet will speak again. Finance ministers and central bankers start two day meetings today, and their statements will influence the markets.
  • CAD: Before the US NFP, Canada will also release employment data: Canadian Employment Change is predicted to fall by 20K, while the Unemployment Rate is predicted to rise to 8.8%. Later in Canada, Ivey PMI is expected to jump up.
  • US: Non-Farm Payrolls are expected to fall by 223K.If these expectations are met, it’ll be the best result since the crisis broke out. Unemployment Rate, which surprised by falling last time, is expected to edge back up to 9.5%. Considering that many have discounted the falling unemployment rate as more of a negative sign, specifically of long term unemployed exhausting their benefits and falling further into poverty, anything but a major upside surprise may not have much effect. The NFP report is arguably the most market-moving event of the week, and as the last two readings show, possibly of the month. However, its significance depends to some degree how much the prior news of the week has already clarified the picture of US and global economic health, as well as whether this provides any major surprise from the expected result.

Conclusion & Suggestions

TRADING OPPORTUNITIES: Each of the three are real possibilities:

· Play the Pullback: Stocks and other risk assets are at highs, the USD deeply shorted against the AUD, NZD, CAD and EUR. Traders should be ready with a plan to play a reversal of this trend when key calendar events (see above) hit this week or if stocks moves down. Specifically, this means be ready to short stock indexes, commodities, and commodity/high yield currencies, and go long the JPY, USD, CHF (in that order) against other currencies.

o For currency traders, possible pairs to short in that case could be: AUD/USD, JPY/USD, NZD/USD, or long USD/CAD. To play these via ETFs: short (FXA, FXC, FXE), (UUP), (DBV). Long (UDN), (FXY), (FXF). See prior analyses for info on why markets remain overbought, overpriced, vulnerable to pullback.

o For stock index traders, short the major global indexes. Via ETFs, short (SPY), long (SDS). Commodity traders would short gold, crude, etc. Via ETFs, short (GLD). Still looking for a good oil ETF. Better to use CFDs for oil.

· Play the Up Trend: However, markets continue to focus on the positive and could continue up as long as no major news contradicts ongoing recovery story or questions current risk asset prices. Continuing low interest rates and upward stock momentum a plus for risk assets. Trade the opposite of the above.

· Play the Trading Range: If news fails to surprise, markets could well stay in flat trading range.

Note: Always use stop loss orders.

Disclosure and Disclaimer: The opinions expressed herein are not necessarily those of AVA FX. The author holds positions in the above mentioned instruments.

Friday, August 28, 2009

Traders' Daily Global Markets Review/Preview for August 28, 2009: Part 2


(Continued From Part 1)

JPY: USDJPY has been heavy for the past few days and is sitting around 93.50 at the time of writing. Concerns about loose US monetary and fiscal policies and the possible return of risk aversion have supported the yen in recent months. The next tests for the yen are the upcoming elections and possible corporate repatriation. We maintain our USDJPY forecast of 95 in 1m and 3m. The S&P 500 and 10y yield relationship has changed recently, as investors have seemingly sought the safety of Treasuries even as equities continued to grind higher. The safe-haven dollar and yen have benefited during pullbacks from risk assets and with confusing signals from bonds and equities and risk assets looking fatigued recently, we might see investor caution, or rather uncertainty, lead to another bout of risk aversion.

In addition to reduced risk-seeking, the yen could gain support from corporate repatriation. Recent press reports suggest Japanese companies are looking to take advantage of an impending tax exemption on dividends from overseas units in order to repatriate overseas profits. As Japanese electorate heads to the polls this Sunday, the latest economic data suggests that political change in the world’s second largest economy is ever more likely. Pre-election polling indicates that opposition Democratic Party of Japan (DPJ) may for the first time in more than fifty years score an overwhelming victory over the ruling Liberal Democratic Party (LDP). The LDP has ruled Japan for all but 10 months since 1955.

SUNDAY ELECTION: Friday morning's economic news which showed that both unemployment and deflation reached record highs should only seal the deal in the voter’s minds for a mandate for change. The unemployment rate rose to 5.7% from 5.5% projected and is the highest level recorded in the post war period. Meanwhile CPI drifted lower to -2.2% versus -2.1% eyed while household spending plunged -2.0% versus forecast of -0.5% decline.

The dour economic news is likely to produce an ironclad majority for DPJ. The DPJ may win more than 320 of the 480 seats in the Lower House according to the Asahi newspaper. Should DPJ win, it promised to increase domestic spending and shift the focus away from strict emphasis on export growth. The net result is that fiscal expenditures are likely to become a lot more aggressive and many analysts expect long term Japanese bond yields to rise as government issues more debt to finance its initiatives.

Higher yields could in turn put further upside pressure on the yen as both domestic and foreign investors flock to the Japanese fixed income markets. It will be interesting to see if the new shift in policy towards domestic demand will help to revive the Japanese economy. We continue to believe that Japan remains very dependent on export led growth and any benefit of higher yen in terms of purchasing power to the Japanese consumer will be more than offset by the potential profit squeeze on the Japanese corporate sector resulting on overall lack of growth for the economy. Nevertheless, this week-end’s upcoming election clearly signals a massive change of course for Japan and the near term impact on the currency market is likely to result in further appreciation for the yen with USD/JPY possibly targeting 9000 level by the fall.

NOK, SEK: Unemployment data encouraging: Swedish unemployment declined to 7.9% from 9.8% previously, beating expectations of a more modest fall to 8.2%. The figure itself is not seasonally adjusted and therefore does not allow for the seasonal increase in employment during the summer months. However, our economists note that expectations-beating print is a positive sign. In Norway, the unemployment rate held stable at 3.0% as expected. We remain short AUDNOK as a recommendation and initiate a new recommendation to go long NOKSEK as we think the SEK could be more vulnerable should risk aversion return.



Oil rose further above $72 on Friday after snapping a two-day fall from 10-month highs a day ago, boosted by better-than-expected GDP and jobs data in the United States that signal the economic recovery is on track. Crude oil prices were also given a lift by a weaker U.S. dollar versus the euro and the commodity-linked Australian dollar, as well as by a late rebound on Wall Street, but were tempered by falls in Chinese stocks.

"People are still looking at the stock markets and the weaker U.S. dollar against the euro, but the market still lacks clear direction," said Ken Hasegawa, a commodity derivatives sales manager at broker Newedge in Tokyo, adding that it would take up to a month for a clearer direction to emerge.

"A lot of people are expecting the economy to go well and the stock market to rise further, but I cannot be so optimistic about the economy. Though it has reached a bottom, real recovery will take two to three years -- I don't see a "V"-shaped recovery."

Analysts expect oil prices to hold in the $70-75 range for some time but not any higher.

The less-than-expected contraction in the U.S. economy in the second quarter, despite a record drop in inventories, and fewer workers filing new claims for jobless benefits, also cheered other commodities, including industrial metals such as copper.

Traders will now watch the Michigan business sentiment survey on Friday for signals that the economy is truly healing, and eye British, French, Swedish and Italian data for clues on how the Eurozone recovery is developing.

In Asia, investors continued to watch any moves by China to clamp down on lending and curb overcapacity, which is still causing chills among equities investors.

The Chinese market has surged more than 90 percent from the start of the year to early August, but fell by more than 15 percent since, sparking concerns over speculation. This prompted a senior finance ministry researcher to say on Friday that rising Chinese property and share prices mainly reflect economic fundamentals rather than a reappearance of asset bubbles


Gold lacked fresh factors distinct to the metal, which was one reason why traders were eagerly waiting the release of August gold import data from India, a large consumer of the precious metal. "Some traders are hoping this will show strong figures," he said. India gold traders were looking for bargains in the gold market this week in anticipation of festival demand.

Gold is being underpinned by buying from speculators, with the euro's recovery above $1.43 and a rally in oil to the year-to-date high levels increasing their risk tolerance," said Shuji Sugata, manager at Mitsubishi Corp Futures & Securities' research team. "But such buying is not sustainable. They stop buying when gold rises towards $960, which looks like an initial resistance," he said.


Japan's Jobless Rate Climbs to Record 5.7% in Blow to Aso Before Election
Consumer Spending in U.S. Probably Climbed in July on `Cash for Clunkers'

Japan unemployment rate hits record high in July and prices fell at record pace- both threatening to undermine a nascent recovery for the world's #2 economy(AP)

The FDIC labeled more than 100 additional banks as “problem banks” indicating that their liquidity and earnings are not up to par. Add on to that the continued instability in Chinese markets and it seems unlikely that stock market gains will be able to continue for long

Jobless claims are becoming the one weekly report that provides a reality check to the fact that recessionary conditions are still very much alive. Despite the constant market rallies and improvement in growth and manufacturing indices, if we do not see a rebound in the employment market it is virtually all for nothing. Jobless claims for the week ending August 22 did fall slightly from the prior week to 570K but missed estimates for an improvement to 565K. In addition, it is troubling that last week’s claims were revised upward to 580K. Even though we have ended a streak of three consecutive weeks of rises and the 4-week average claims fell, we are nowhere near what would be considered conditions typical of a normal employment market. Economists estimate that a reading of 325,000 claims is considered healthy, far below our current stubbornness to fall under 550,000. The employment risk will start creeping back into everyone’s minds as we head into next week’s Non-Farm Payroll report which may show that unemployment creeps closer to the Obama administrations 10% estimate

The weekly jobless claims may become the key economic indicator for the currency market as we enter the fall season. If claims persist above the 550K level and worse even escalate towards the 600K handle the recovery thesis will begin to unwind as final demand will not be materialize. On the other hand, if jobless claims begin to drift toward the 400K zone, the recovery trade will no doubt get a second wind and the risk trade in FX could go on to set new yearly highs.

Global Market Direction?
Because global stocks have set direction for commodities and currencies, we present links and key points of articles arguing for and against further upside.While we remain skeptical, there is growing evidence for further upside with stocks. In the interest of presenting a balanced picture, consider the following.

Bull in a China Shop [Excerpt]

LONDON (Reuters) - Investors have one overarching fixation as they head into next week -- is China's volatile stock market going to trigger a global correction that will eat up many of the stock gains made since March?

They will also be keen to get the latest consumer confidence news from the U.S. economy, along with related data on house prices.

Japan, too, is likely to come into view as its general election approaches.

But it is easy to see how much of the focus next week could be on Shanghai. The bourse's Composite Index .SSEC lost more than 20 percent in 11 trading days to Wednesday. That -- at least by tradition -- takes it into a bear market.

Fund trackers EPFR Global calculates that jitters about China during the latter part of that period pushed net outflows from Asia ex-Japan and global emerging markets to 24-week and year-to-date highs, respectively.

The fear among investors is that a further fall could be contagious and nudge other risk assets into a correction after so many weeks of gains.

Concern may be overblown, however. For one thing, the Shanghai index bounced back more than 6 percent in the last two sessions of the week, underlining just how volatile it is.

Then there is the issue of low August volumes exaggerating moves.

China's economy is also in relatively good shape, especially when compared with developed ones. Factory output and capital spending are both rising and the authorities continue to hold to a cherished eight percent GDP growth target.

Stocks Set to Continue Rally?

If economic data along with the Fed can be used as a guide, there no reason to see global stock markets retreat to any appreciable degree going forward. Therefore, expect to see markets continue to rally over the third and fourth quarters.

The Fed has basically raised its assessment of the economy, noting in the latest statement that “economic activity is leveling out.” Inflation figures to remain “subdued for some time” and the market has again been reassured that rates will not rise for an “extended period,” a sign that policymakers are in no rush to end their efforts to boost the economy. Language slightly less optimistic helped stocks rally over 12% since the previous meeting on June 24.

German and French GDP rose 0.3% in the second quarter which helped limit the overall European contraction to just 0.1% over the period, an indication that much like the U.S. the worst recession in the post-war period has just about ended and that economic expansion will occur over the third and fourth quarters of 2009. The ECB is likely to remain cautious however, and looks to continue its program of offering banks unlimited amounts of cash while keeping borrowing costs at record lows.

The Libor-OIS spread, the premium banks charge over the expected daily Fed Funds rate, narrowed to 25 basis points overnight, a level that former Fed Chairman Allan Greenspan labeled as “normal.” And while the banks still remain reluctant to lend, cash has been and likely will remain readily available in the capital markets. High grade U.S. companies sold $898 billion of bonds this year, the busiest period since at least 1999 according to Bloomberg, while European firms have issued a record $1.2 trillion this year, more than was sold in all of 2007. Ten year investment grade spreads, the difference between corporate borrowing costs over risk-free Treasuries, narrowed from 603 basis points down to just 254. Liquidity has been just as available in the high-risk markets; non-investment grade firms have sold at least $19.8 billion of debt this week and sales this year total about $858 billion compared with $648 billion during the same period last year.

Emerging-market stocks increased by the most in almost two weeks on Thursday after the Fed’s statement reassured investors there. The DJ Stoxx 600, a European index, gained 1.6% heading into the N.Y. open.

The dollar will likely continue declining against the euro, pound and A$ as those currencies resume their months-long rally against the yen. Commodities will remain strong while government debt prices decline. Expect to see the normal in and out breathing along the way, but just ignore it for the time being because more cash is likely to come into the market as investors grow even more fearful of missing the rally and give up waiting for a significant retracement.

Why Markets May Be Ready to Pull Back: Links to articles worth seeing.

Preview from Europe: Non-Farm Payrolls Add to Bullish Tone
Very good graphs on Bob Farrell's Rule # 8: bear markets have 3 stages 1. sharp downturn 2. reflexive rebound 3. drawn our fundamental downtrend & shows we're in reflexive rebound stage, prelude to a further downturn in stocks and other risk assets.

Preview from Europe: Stocks Consolidate at Lofty Levels
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Key points include:
A record 13.9% of companies beat their EPS estimates, prior record was 7.9% in Q1 of 2004. Does this suggest the game of lowball estimates have become far more exaggerated?

Year over year profit growth still at -29.5%. Yes, that's better than the -31.7% consensus estimate before Q1, but at the start of the year estimated growth rate for Q2 was -11.3%, So actually, earnings are coming in below expected by more than 18 percentage points on this basis, but believe me, there is nary a newspaper or a bubblevision TV program that is going to make mention of that particular statistic.

What about guidance? Again, not a broadly reported statistic but there have been 39 negative EPS pre-announcements versus 15 positive pre-announcements thus far for 3Q. That yields a negative/positive ratio of 2.6x, which is actually well above the 1.8x at this same juncture during the Q1 reporting season three months ago and the long-run average of 2.1x.

What about valuations? The S&P 500 is trading at 16.5x calendar year 2009 earnings estimates; 14.7x four-quarter forward estimates; a 13.2x calendar year estimates. These are forward estimates, which are merely analyst projections, and they are based on operating, not reported earnings. And the best, the very best, multiple that can be drummed up is 13.2x. That doesn’t exactly sound like bargain prices from where we sit, especially when dividends are being slashed and the corporate bond market is still offering up coupons of over 7%.

Coming Soon: Banking Crisis of Historic Proportions

Key Points:
Banks are not doing enough business to earn their way out from under a still growing mountain of loan default losses
Bank failure rate much higher than anticipated two months ago. For 2009, may have about 230 vs 125 forecasted, and amount of assets involved is much larger than in past per bank failure
Loan defaults increasing for several more quarters, especially commercial loans
FDIC is in trouble, probably bankrupt
May be going to historic lows in bank credit
Best case US GDP Growth of about 2% per year for 2010-11 will not be enough to allow many mid sized and smaller banks to survive.


As noted in the summary, there are three real possibilities regarding market direction, at least for the short term. The most likely, however, appears to be continued range trading unless some very potent news comes along. This week's calendar is relatively light on market moving news, however with markets still near highs, there is potential for volatility.

Next week will likely be dominated by a slew of manufacturing data from around the world, central bank comments, and climaxed by US non farms payrolls data.

DISCLOSURE & DISCLAIMER: Opinions expressed do not necessarily represent those of AVA FX. The author has positions in above mentioned instruments

Traders' Daily Global Markets Review/Preview for August 28, 2009: Part 1

Stocks, Commodities, Risk Currencies Up As Markets Continue to Focus on the Positive


All markets chopping in tight trading ranges seeking direction, China stocks weakness frOM credit tightening/fear of bubble threaten risk assets. In the short term, tight ranges, trends favoring risk assets remain for now. IN SUM, NO CHANGES, TIGHT RANGES, multi- week trends in place until we get market moving news. With US unemployment still getting worse, next Friday's NFP and anything related to it could be the next market mover.


Asia ,Europe mixed/down.
US: Up slightly: All remain in tight trading ranges [lack of major news]Asia, Europe down, US slightly up, lots news but none moves markets (mostly as expected), even Q2 GDP, which beat expectations -1.0 vs -1.4%, dropping USD helps materials stocks, crude oil, so another low volume, late buying lifts US stocks, Dow to 8th straight advance.
Asia mixed/down near close.


Short Term: Overall, following stocks. Thus risk currencies (AUD, NZD, CAD, EUR) advance vs. safeties (JPY, USD, CHF)on rising stocks, risk appetite, stay in tight ranges w/in trends due to lack of news.
Longer Term: trends remain in place, risk of stock pullback and the concomitant drop in risk appetite that could reverse current trends. Tactical trade recommendation, selling AUDNOK on a break below 5.00, and targeting a move to around 4.78 with a stop around 5.0950, may benefit from any move in risk appetite, see email/brief for more. USD/GBP also has lots of news coming out for both on Friday. JPY could rise if political change brings more Japanese government debt, higher interest rates.

EUR: EUR/USD—stay long will follow risk appetite in ST, also more fundamental improvements may be behind moves beyond trading ranges
USD: Until there are major improvements in US economic fundamentals, is likely to continue to move opposite stocks as a safe haven sold to finance carry trades when there's risk appetite, then repurchased in times of fear.
AUD, CAD, NZD, CHF: Following their roles as either risk or safe haven currencies. AUD economy looking relatively strong, could sustain AUD strength.
JPY: UP on safety demand. The yen rose broadly against major currencies on Friday as investors remained worried about the potential for further weakness in Chinese shares and shied away from risky investments. A trader for a Japanese brokerage cited dollar-selling by Japanese exporters, and added that the dollar's weakness against the yen was partly due to technical factors. Sunday election likely to bring in a rare DPJ majority, likely results include more debt>higher interest rates and demand for JPY.
GBP: We maintain our 3m GBPUSD forecast of around 1.51. NB This could be a trend with room for gains of over 100 pips, has tech weakness f/ further downtrend, but much depends on stocks. Near term, the NFP report next Friday could of course also move this pair, along with everything else if there is a surprise in either direction.


Rising w/ stocks, risk appetite. Crude oil: Up over 2% from about $70 to about $72.70. Gold is up around 1% to almost $950, in a tight trading range for the week.

stocks continue to focus on the positive, pulling other risk assets along, but remain vulnerable to pullback the higher they go, especially if US unemployment does not show real improvement in next Friday's non farms payroll report.

The current willingness of markets to focus on positive may stop if US unemployment, consumer spending doesn't show real recovery signs. Three real possibilities in the near term.
· TRADING OPPORTUNITY: Play the Pullback: Stocks at highs, dollar deeply shorted, be ready when key calendar events (see below) hit this week or if stocks moves down to short risk assets, go long USD.
· Play the Up Trend: However, markets continue to focus on the positive and could continue up as long as no major news contradicts ongoing recovery story or questions current risk asset prices.
· Play the Trading Range: If no major news, markets could stay in flat trading range. Continuing low interest rates and upward stock momentum a plus for risk assets. NB: In the days before next Friday's non-farms payroll, traders often get cautious, prompting flat trading or small pullbacks

Note: Always use stop loss orders.

Main Events

THURSDAY lots of news, but it doesn't surprise or move markets. US GDP shows contracting more slowly, unemployment worsening & growing army of unemployed with expired benefits.
FRIDAY: Japan consumer spending, unemployment, deflation worsening. GBP consumer confidence down, revised Q2 GDP, CHF KOF Economic Barometer, USD personal spending, UoM Consumer Sentiment,

Market Summary Table: Risk vs. Safety Sentiment

[1] Actual ask price for currencies, futures contract prices for stock indexes, commodities. Direction and prices are at time of writing, 6am GMT


US: Plenty of news but no surprises. However, a falling USD caused commodities and related materials stocks to lead a mild rally on low volume and manage to close a bit higher, giving the Dow a rare eight straight upside closes. Financial stocks also had buyers, despite the FDIC's announcement that it's list of problem banks had expanded to include another 100, bringing the total to a 15 year high, and that noncurrent loans and leases had increased for the 13th consecutive quarter.

Thus the good news is that stocks remain resilient in the face of negative events that might spook other markets into selloffs. The bad news is that one wonders how long stocks and other risk assets can keep rising without a real recovery, especially in employment and consumer spending, when none seems to be coming soon.


General: In the near term, currencies are following risk appetite as reflected in stocks.

Trade Ideas:

Longer Term: For the AUDNOK a break below 5.00 might signal a further downtrend to around 4.78 with a stop around 5.0950. Although we expect both currencies to perform well as a weaker dollar should benefit the commodity currencies, we expect a relative value opportunity to emerge as good Australian economic news looks to be fully priced in, while the NOK still has some catching up to do. If the world economy continues to improve from here, more Norges hikes are likely than priced. If it falters less RBA hikes are likely than priced. Either scenario should favour AUDNOK downside.

Pair of the Day:GBP/USD will be the currency in play for the upcoming 24 hours. Great Britain expects an influx of economic data tomorrow including Gov. Spending, Private Consumption, and Exports/Imports at 8:30GMT or 4:30AM EST. Thereafter, the U.S. expects release of Core PCE and Personal Spending at 12:30GMT or 8:30AM EST, followed by U. of Michigan Confidence released at 14:00GMT or 10:00AM EST.

The GBP/USD benefits the least out of today’s risk surge and still remains overbought. However, if today’s small gain signaled the beginning of a new move to the upside, resistance stands around 1.6624 or the August 21 high. However, if momentum should continue to the downside, support stands at the crucial psychological resistance around 1.6000, which was also a low from early-July. With strong support to the downside, GBP/USD may well just oscillate within this range until there is market moving news.

EUR: Finally, the currency is starting to respond as more good news is piled on to what we have already seen this month. Germany has set the example and will be the one to catch up to in the coming months. Their excellent record continues with both Consumer Prices and confidence. After showing the first annual decline in prices last month in more than two decades, CPI has rebounded to 0.0% on an annualized basis. Much of the inflationary pressure came from clothing and prices associated with holiday travel. The fact that prices have held steady for the biggest EZ economy has surely prompted a big sigh of relief for the economists at the European Central Bank, but does not completely discredit deflationary concerns.

GFK Consumer Confidence rose to the highest in 15 months to 3.7%. The report’s indicators of economic and income expectations both showed strong performance as recent market advances have had a noticeable impact on the consumers hopes that things are starting to get back on track. GFK left us with comments that reiterate the fact that “economic pessimism is continuing to wane.” They also pointed out that the low inflation levels have increased consumer purchasing power giving them “more money in their pockets”. More in terms of confidence is due for release tomorrow with the Euro-zone’s Consumer and Economic Confidence Indicators. The combination of strong financial markets and Germany and France’s recent return to growth should leave little reason for sentiment to disappoint

USD: Drops as stocks rise on thin volume. US equities turned around a downbeat morning session and finished slightly positive, with financial and industrial sectors leading the way. We saw a wave of afternoon dollar selling, which was largely attributed to stops that were triggered in a thin market. EURUSD traded within 1.4220-1.4407 and USDJPY 94.29-93.22. Q2 real GDP was unrevised at a -1.0% annual rate and the stronger composition of output is positive for later growth, as any strength in demand will more likely be filled via production rather than via further inventory liquidation. New jobless claims fell to 570k versus consensus 565k. Although new claims show little improvement over the past month, total claimants slipped between the July survey period and the first week in August. We maintain our 3m EURUSD forecast of around 1.30, based on the belief that stocks need to pull in at some point. When they do, so should this pair.

CAD: Following other risk currencies higher w/ stocks. Current account data ahead: The current account deficit likely increased in Q2, which would be the third quarterly deficit in a row. BoC Deputy Governor Lane's comments helped keep USDCAD supported and we think Canadian officials will continue to use verbal intervention to combat CAD strength. We maintain out 1m USDCAD forecast of around 1.15, again based on the belief in a coming pullback in risk assets.

GBP: Business investment disappoints: Provisional Q2 GDP is due and we expect a small upward revision given better industrial production numbers. The provisional figure follows the July 24 GDP release, when the -0.8% q/q figure was below consensus of -0.3% q/q. Officials noted that although Q2 GDP had been weaker than forecast, output seemed to have since stabilised. But data releases were mixed as better than expected changes in Nationwide House Prices were offset by below consensus business investment for the second quarter. We maintain our 3m GBPUSD forecast of a drop to around 1.5100. NB This is a trend with room for gains of over 100. There is technical weakness, and the pair would move this way if stocks pull back, which we suspect is more likely than not in the near term.

AUD: Positive economic indicators as well as resurgence in risk appetite pushed AUD/USD near this year’s high. CB Leading Index showed expansion in short to medium term future as Australia remains one of the best performing G10 nations during current world economic recovery phase. However, the best news came from unexpected rise in business investments during the second Quarter. Australia’s Private Capital Spending rose by 3.3%, adding to the evidence of the economy evading a possibility of a “double dip” contraction. The RBA already hinted that a conclusion to the “emergency” setting of interest rate at 49-year low of 3.0% may not be too far in the future. The investment figures suggest that the economy remains on the right track and expansion in the monetary policy may come before the year end.

NZD: closed at the highest level against the greenback since September of last year. New Zealand’s Trade Balance deficit narrowed to the smallest figure in six years as the worst recession in decade’s curbed demand for imports. Imports tumbled 21% from last year led by a reduction in consumer spending as companies cut investments and rapid unemployment rise. Exports slumped as well largely in part to a rise in the “kiwi” which jumped 35% against the U.S. Dollar in less than half a year.

CHF: See weekly preview

See Part 2 for continuation

Opinions expressed do not necessarily represent those of AVA FX. The author has positions in above mentioned instruments.