Friday, August 28, 2009

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.

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