Tuesday, September 15, 2009



- Stocks: Monday Asia, Europe down, US up

- FX: Generally following stocks. Safety currencies [JPY, USD, CHF in order of safety appeal] generally up vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD hitting or approaching annual lows as stocks, commodities rise USD becoming preferred funding currency for carry trade!! Major Implications – See Conclusions

- Main events today: GBP: CPI, Inflation Report, EUR: German ZEW Sentiment, USD: Core Retail Sales, PPI, Retail Sales, Bernanke

- Big Theme: A light news week makes range trading more likely, especially after recent gains in risk assets. Higher chance of pullback than further advance, but markets have managed to advance for months on mixed data, so further advances can't be ruled out, especially if the USD continues to weaken. New lowest USD 3 month LIBOR rates now make the USD the new preferred funding currency, potentially big implications for further exaggerating USD weakness against rising risk appetite and risk assets.



Weakness overseas and concerns regarding trade with China weighed on sentiment in the early going, but stocks worked their way out of negative territory to finish the session at fresh highs for 2009.

The stock market started the session with a loss of roughly 0.7% as several major foreign markets were knocked lower by profit takers. The case for paring positions also seemed appropriate since it appeared that the major U.S. indices were losing momentum after slipping from 2009 highs last Friday to log a loss and finish last week on a down note. Participants were also a bit unsettled by news that China's trade officials have threatened to restrict chicken and auto product imports from the U.S. in response to the decision by U.S. officials to place punitive sanctions on Chinese tire imports.

Despite the inclination to sell this morning, buyers showed resolve and began pushing stocks higher. Their efforts gained momentum as short sellers were forced to cover their positions. Stocks did run into a bit of resistance as they encountered the 2009 highs that were registered late last week. However, a final push in the closing minutes of trade helped the stock market settle at its best level of the year. The S&P 500 is now up more than 16% year-to-date.


Down Monday, opens Tuesday down but reversing to positive territory in afternoon trade.


Opening up in early morning trade.



ASIA- DOWN NIKKEI -2.32% HS -1.08% SSEC -1.24% FTSTI -0.04% AORD -1.31%

EUROPE - DOWN FTSE +0.15 DAX -0.07% CAC -0.11%

US- UP DJIA +0.22% S&P +0.63% NASDAQ +0.52%



NIKKEI +0.15 % HS -0.33 % SSEC +0.23% FTSTI +0.58 % AORD +0.24 %



FTSE +0.06 % DAX +0.04% CAC+0.31 %



Oil prices hovered below $69 a barrel Tuesday in Asia as investors weighed concerns about weak crude demand against optimism of a global economic recovery. U.S. oil inventories are higher now than in May, and analysts expect demand to drop off in the autumn following the summer driving season.

Investors will be looking at supply data Tuesday and Wednesday for clues about the consumption trend. Analysts expect inventories to drop 3.0 million barrels,

Crude investors have also been mulling the U.S. dollar, which fell to its lows of the year last week. The dollar rebounded late last week, sparking a $4 drop in oil prices.


Gold prices steadied at around $1,000 per ounce on Tuesday, underpinned by a fall in the dollar versus the euro, while investors were mostly cautious on whether the metal's recent run to an 18-month high was overdone. The euro climbed in early trade on Tuesday, staying in sight of its 2009 highs. Surging investment demand for gold due to a weaker dollar and inflation fears is likely to offset a decline in jewellery buying this year, leading to an overall rise in demand, metals consultancy GFMS said on Monday in a Reuter's article.

Gold prices are likely to correct after their current run above $1,000 an ounce, but may rebound to as high as $1,100 within the next six months if inflation fears grow, GFMS said in an interview.


General: Overall following stocks, slight bias to risk currencies, with exceptions reflecting reaction bounces from prior day moves. See Weekly Outlook for details. Market focus now shifts to a slew of U.S. data that will be released between Tuesday and Thursday and which could determine whether or not the dollar will continue to trade lower or pause.

USD – After a particularly tough trading week, the lack of U.S. economic data has helped the dollar recover against all of the major currencies except for the Euro and Swiss Franc. The resilience of these 2 currencies actually suggests that traders are still very bearish dollars and confirms our belief that a mere rebound in the dollar does not necessarily threaten the downtrend.

USD now has the cheapest 3 month LIBOR rates of any major currency, making it the preferred funding currency for borrowing in order to fund purchases of higher yielding currency assets, putting more downward pressure on the USD.

A steady drop in Treasury yields in the past few weeks had surprised many and triggered speculation that the U.S. dollar was also fast becoming the preferred funding currency for carry trades. "Signs of a recovery alongside rock-bottom interest rates in the U.S. would continue to weigh on the dollar index," said David Watt senior currency strategist at RBC Capital in a Reuters article.

It has become cheaper to fund in dollars than in the Japanese Yen using the 3 month LIBOR rates. Since then, the spread has moved further in the Yen’s favor with the U.S. 3 month LIBOR rate falling to a record low, which is unquestionably bearish for the dollar.

The dollar traded near the weakest level this year against the euro as record-low borrowing costs encouraged investors to sell the greenback and buy higher- yielding assets outside the world’s largest economy.

The cost of three-month loans in dollars between banks dropped yesterday to a record low of 0.295 percent, according to the British Bankers’ Association. The London interbank offered rate, or Libor, slid below that of the Swiss franc on Sept. 8 for the first time since November.

The dollar index <=USD> was 0.09 percent lower at 76.586, not far from a one-year low of 76.457 struck late last week. Up against JPY, GBP, down against, EUR, AUD, and CAD.

The Dollar Index traded near the lowest level in almost a year after FOMC member Yellen said there’s a “fear,” which is “real, growing and disruptive,” that the Fed will be unable to withdraw its $1 trillion expansion of credit.

“We face an economy with substantial slack, prospects for only moderate growth, and low and declining inflation,” Yellen said yesterday in a speech in San Francisco. Until the time comes to raise interest rates, “we need to defend our price stability goal on the low side and promote full employment,” she said.

Chartists say the index is now below any Fibonacci support and could fall to 2008 lows of around 70.70.

"Strong trends remain in place for the euro, Australian and kiwi dollar," National Australia Bank said in a note. "Even dollar/yen has all-round signals to the downside. These signals only confirm the overall downside risk in place for the U.S. dollar."

NB: The USD pairs, especially the EUR/USD could experience volatility with Tuesday's US Retail Sales data. It has been noted, however, that the EURUSD tends to return to its pre-release level within anywhere from a few minutes to a few hours after the release, giving traders a way to play short term moves before and after the report

EUR- The euro climbed in early trade on Tuesday on investor confidence and ECB upgraded growth forecasts, staying in sight of its 2009 highs, supported by growing talk that Asian central banks were bidding the single currency and moving away from U.S. dollars. Has strengthened 2.1 percent in September and may gain for a third-straight month, its longest winning streak since March 2008. The euro was near a nine-month high against the dollar before a German report economists said will show investor confidence rose to the highest in more than three years.

The weekly chart of the euro against the dollar also shows a “big jump -- the strongest price action since May

JPY - The dollar also eased against the yen to 90.85 yen, from 90.94 yen late on Monday when it gained nearly 0.3 percent. It bounced in the previous session after investors reversed short positions, probably options-related and on the back of a sharp rise in 10-yr Treasury yields.

A steady drop in Treasury yields in the past few weeks had surprised many and triggered speculation that the U.S. dollar was also fast becoming the preferred funding currency for carry trades.

GBP – The pound gained for the first time in three days against the yen after a U.K. report today showed more surveyors reported a gain in British home values than a drop for the first time in two years.

The number of U.K. respondents saying prices rose in August exceeded those reporting declines by 11 percentage points, the first positive reading since July 2007, the London-based Royal Institution of Chartered Surveyors said.

“The RICS data indicates the U.K. housing market may have stabilized, suggesting the economy is on the mend,” said Takashi Kudo, director of foreign-exchange sales at NTT SmartTrade Inc

The Bank of England last week said it won’t expand its 175 billion pound ($291 billion) asset-purchase program and kept its benchmark interest rate at 0.5 percent.

The pound rose to 151.40 yen from 150.81 yen, and the U.K. currency climbed to $1.6605 from $1.6583 in New York yesterday.

Our economists continue to expect another ?25bn expansion of its purchases and may also announce a penal interest rate on central bank reserves to encourage banks to divert reserves balances to other assets. Thereafter, the focus will be on exit strategies, but we believe the BoE is still not ready to purse these steps due to the current climate.

AUD – Minutes of the latest Reserve Bank of Australia meeting revealed that the central bank remained cautious and that no rate hike was due before mid 2010. Coupled with last week's disappointing housing data, Aussie bulls hoping for a rate hike in 2009 have been disappointed over the past week.

NZD – bounced back from Monday's slide which saw it touch a low of $0.6965. It hit $0.7060 in offshore session on the back of prolonged weak U.S. dollar as Wall Street gained. NZ's data calendar light this week, leaving the kiwi to follow broader market events and direction, with focus on the Reserve Bank of Australia's minutes on Tuesday. Second-quarter NZ manufacturing sales data, the last piece of data to feed into GDP, due at 2245 GMT

CAD – Moving with risk appetite, looming threat of intervention if USDCAD drops too low is expected to keep a floor on the USDCAD

CHF – May see heavy volatility ahead of SNB monetary policy announcement, which may provide hints concerning SNB intervention. The currency pair is now trading within intervention territory and we believe that the risk is high for the SNB to sell Francs or at bare minimum talk down the currency this week. Swiss Producer Prices were release this morning and inflationary pressures have increased modestly. Industrial production is due for release tomorrow.


The theme last week continued with USD weakness, and equity strength on positive news, with commodities pulling back, and currencies generally following equities in expected fashion, with exceptions. Even popular financial TV noting big action is not in stocks but currencies and commodities.

The big news: USD 3 month borrowing rates are now THE cheapest, making the USD the new preferred funding currency for 3 month carry trade ( i.e. borrowing USD for 3 months to fund purchases of higher yielding bonds/commercial paper, etc in another currency). If this condition persists, implications include:

Greater downward pressure on the USD when stocks or other risk assets rise, which then encourages more carry trade

Greater upward pressure with rising risk aversion and unwinding of carry trade, thus USD could see big rally when stocks pullback

Recovery brings challenges exporters to US, holders of US debt. More foreign purchases of US businesses, real estate, and other hard assets?

Another psychological blow to USD

More potential inflationary pressure when recovery actually starts as commodity inputs become more expensive for the US

But will it continue? Japan still has higher US debt levels.

Trading Opportunities: 1. Be prepared to play a pullback in risk assets and get ready to sell 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, though gold and crude may be approaching new breakouts. Always use sell stop orders.

Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back.



U.S. Said to Explore Selling 34% Citigroup Stake Acquired in Bank Rescue

•Obama Says U.S. Job Losses Ending, Vows to Push on Wall Street Regulations

•Europe Eclipses North America as World's Richest Region by Assets Managed

•U.K. House Prices Stabilize as Most Surveyors Report Gain in Home Values

•Chinese Response to U.S. Tire Tariffs Won't Spark Trade War, Obama Says

•Emerging Europe's Banking Industry Threatens Recovery, EBRD's Berglof Says

Goldman's O'Neill Foresees `Silly September' as Japanese Yen Appreciates: Believes Yen rise unjustified


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U.S. Median Income from 1999-2009: No Gain, Much Pain Sep 13, 2009

Cochrane Lambasts Krugman's View of Macroeconomics Sep 13, 2009

Confidence Game: Consumer, CEO and Investor Confidence (Sept. 2009) Sep 13, 2009

10 Notes on Risk in the Markets Sep 13, 2009 Economic Donkeys Sep 13, 2009


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