Tuesday, September 22, 2009

GLOBAL OUTLOOK MONDAY SEPT 22nd:USD Rally Explained, Coming Oil Moves


- Stocks: Monday: Asia, Europe, US down, Tuesday morning Asia mixed, Europe up

- FX: Despite dropping equities, safety currencies [JPY, USD, CHF in order of safety appeal] generally down Tuesday morning vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD retreating again

- Main events today: CHF: Trade Balance, CAD: Core Retail Sales m/m, NZD GDP q/q USD: FOMC meeting starts Wed

- Big Theme: See Weekly Outlook for full details Global equity, commodity, and fx markets overall rising, indicating belief in recovery- but we believe assets are overbought with enough risk for flat or even double dip recession to temper current optimism. Declining USD and increased use as funding currency for carry trade has major implications



The Nasdaq logged a modest gain as biotech stocks advanced in the face of broader market selling pressure, which kept the Dow and S&P 500 in the red for the entire session.

Coming off of a gain of more than 2% last week, participants moved against stocks in broad fashion. Of the 10 major sectors in the S&P 500, health care was the only one to sport a steady gain for the vast majority of the session. It finished 0.7% higher as biotechs climbed 2.4%.

This session's losses were steepest among financials, energy stocks, and materials stocks. All three shed 0.9%. Financials fell as consumer finance stocks (-2.5%) and life and health insurers (-2.1%) faltered, but energy and materials stocks were pressured by falling natural resource prices.

A rebounding U.S. dollar, which lifted the Dollar Index to a 0.5% gain, only emboldened the desire of participants to dump commodities.

For the fifth consecutive month, the Leading Indicators Index posted positive growth. However, the 0.6% increase for August was slightly less than the 0.7% increase that was widely expected and was also down from the upwardly revised 0.9% increase that was registered in July. There wasn't much importance placed on the report since it has done a poor job in past recessionary cycles of predicting the shape of economic recovery.


HONG KONG (AP) -- Asian stocks are modestly lower Monday as investors look to this week's Federal Reserve meeting for more clues about the strength of the U.S. recovery.A number of markets across the region including Japan were closed Monday for holidays. Oil prices fell, while the dollar was little changed against the yen and the euro.


European shares down Monday on profit taking, financial stocks weigh markets in Europe and worldwide



Others closed


ASIA- DOWN NIKKEI -0.0% HS -0.70% SSEC % FTSTI 0.0% AORD +0.0%

EUROPE - DOWN FTSE -0.57 % DAX -0.62% CAC-0.41 %

US- DOWN DJIA -0.36% S&P -0.34% NASDAQ +0.13%



NIKKEI closed HS +0.38 % SSEC -2.34% FTSTI +0.55% AORD -0.28 %


FTSE +0.82 % DAX +1.04% CAC-+0.84 %


Oil futures prices dropped 3.2% to $69.71 per barrel, while natural gas fell 5.4% to $3.57 per contract. Gold prices finished 0.5% lower at $1004.90 per ounce, while silver prices settled 1.1% lower at $16.88 per ounce. Their collective weakness took the CRB Commodity Index down 2.2%, which is its worst single-session percentage loss in more than one month. Concerns over a possible pullback in equities and concomitant renewed USD strength, as well as uncertainty ahead of the FOMC meeting are pressuring commodities.


Oil rose to $70 a barrel on Tuesday in a technical rebound after its 3.2 percent decline in the previous session, as traders watch for clues to the health of the global economy from a U.S. Federal Reserve meeting and a summit of G20 nations this week.

Oil's Monday fall followed a re-emergence of demand growth uncertainty in the wake of bearish comments from Asia's top oil refiner, Sinopec, that China's diesel demand remained depressed, while the International Energy Agency said world power output was likely to drop this year for the first time since 1945. Oil remains in a 2 month range of $68-$72. Most analysts agree the fundamentals of supply and demand are still weak and most of the market optimism about a global recovery in energy demand has already been priced in.

China's gasoline exports jumped to their highest since early 2007 and diesel sales remained unexpectedly strong last month, data showed on Tuesday, fuelling concern that domestic demand in the world's No. 2 consumer is failing to keep up with record refinery production.

Near Term Prospects for Oil: All agree prices will move—but which way?

Oil Going Down

Oil Options Hit Highs as Verleger Predicts 44% Plunge: If ever there was going to be a retreat below $60 a barrel, it is now,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a telephone interview. “It was a very weak summer. We came out with more gasoline than we started.”

Right to Sell

Options granting the right to sell, or put, oil in December below current prices have a so-called implied volatility of 54.3 percent, compared with 43.3 percent for the equivalent options to buy, or call, data from the New York Mercantile Exchange show.

The premium for December and other put options shows “the market is worried,” said Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA in London. “If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation” for the option, he said.

Demand for puts may be caused by speculators betting on lower prices or by producers hedging against a decline in the value of their oil, Tchilinguirian said. “There’s all this heating oil with no place to go,” Philip Verleger, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a phone interview. “I’m fairly certain we’ll see prices in the $30s this year.”

Oil Going Up

Al-Naimi’s View

Saudi Arabia’s oil minister said stockpiles have become irrelevant to crude prices because of the rebound.

“Economic growth is the name of the game,” Ali al-Naimi told reporters in Vienna on Sept. 9 before a meeting of the Organization of Petroleum Exporting Countries. “Oil today is a commodity. As long as economic growth is there, the price is going to go up.”

Traders are betting with al-Naimi. Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures 38 percent in the week ended Sept. 15 to 45,557 contracts, according to U.S. Commodity Futures Trading Commission data.

OPEC, whose members supply about a 40 percent of the world’s oil, agreed at the meeting in Vienna to maintain current production quotas and eliminate surplus production.


SINGAPORE, Sept 22 (Reuters) - Gold edged up on Tuesday to around $1007 as bargain hunters resurfaced after the price dropped to its weakest in almost a week the previous day, although a firm U.S. dollar looked set to limit gains. Worries that speculators who have built up extremely long positions in New York would liquidate, plus the impact of the IMF's plan to sell gold, were still at the back of investors' minds, but lower prices could also attract buying from jewelers. Trading was muted in Asia, with Japanese investors away on holiday, while the movement of the dollar ahead of a Federal Reserve monetary policy meeting, and a Group of 20 summit, were likely to set the tone for gold prices. Rising USD and uncertainty ahead of the FOMC meeting Wednesday also pressured gold.


General: In early Tuesday Asia trade, despite dropping stocks, bias to risk currencies, but USD down against the safer JPY and SNB intervention prone CHF, suggesting specific USD weakness. Unfortunately we do not anticipate any big moves in the currency market on Tuesday. With Japanese traders still on vacation and a light U.S. economic calendar, traders will continue to count down to Wednesday’s FOMC meeting. The upcoming event risk could keep new money out of the markets and encourage more profit taking of short dollar positions. The USD has rallied over the past days against virtually all majors.

USD The U.S. dollar strengthened against all of the major currencies Monday, dropping in Tuesday Asia trade. The most significant gains on a percentage basis seen against the Canadian dollar and Japanese Yen. The euro on the other hand continues to be the most resilient currency, falling only modestly against the greenback. For most of the U.S. trading session, the EUR/USD traded in lockstep with stocks and for that reason we continue to believe that as long as equity traders do not back down from their desire to take the Dow to 10,000 and the S&P to 1,100, there will still be more sellers than buyers of dollars in the market. The positive close in the Nasdaq suggests that equity investors remain optimistic.

The main reasons dollar traded higher Monday include:

1) First, the volume in the foreign exchange market was relatively light with Japanese traders off on holiday and the lack of Eurozone economic data on the calendar.

2) Secondly, the dollar became extremely oversold in the past few weeks and the major event risks this week has encouraged profit taking. There is a good chance that the Federal Reserve will upgrade their economic assessment and express their optimism in the form of changes to their plans of purchasing mortgage backed securities. Based upon G20 officials, the dollar will not be under attack at the upcoming meeting but there are reports that the G20 could focus on a proposal from the U.S. called the “Framework for Sustainable and Balanced Growth.”

3) Leading indicators also rose for the fifth month in a row. Even though the rise was less than anticipated and slower than the previous month, the July data was revised up materially from 0.6 to 0.9 percent.

Of special note about the Conference Board Leading Index: The coincident index was 0.0% in August after an upward 0.1% gain in July. Prior to July the coincident index fell in the previous eight straight months. The coincident index is an important signpost for determining cycle peaks and troughs. Dating back to the 1960 recession, the coincident index has troughed in the same month as the economy in six out of the seven recessions. Based on cycles since 1960, the leading index has troughed six months, on average, before the economy. The lead time has ranged from as short as two months to as long as 11 months. In this cycle, it appears the leading index to have bottomed in March. Investors will likely continue to reduce risk positions ahead of the FOMC.

USD Reserve Status and the G20: Despite currencies not being on the main agenda, there has been a lot of talk about the dollar’s status as a reserve currency ahead of the G20 meeting. Although China also wants a greater role for the Yuan, we don't expect an aggressive attack on the dollar but as the greenback continues to fall, the threat to its role as a reserve currency increases. Whenever the dollar is very weak, central banks and foreign investors start to become very concerned about the notional value of their investments. In a more stable economic environment, the dollar's reserve status would be a greater issue at the G20 meeting, but right now, G20 leaders have bigger concerns, including possible friction over protectionism. In the meantime, foreigners continue to buy dollar denominated assets. Based upon a report from Merrill Lynch, international investors including central banks have boosted up their purchases of U.S. Treasuries because they expect inflation to remain muted. Foreigners encompassed 43.1 percent of the demand for Treasuries this year compared to 27.1 percent in 2008.

EUR- Struggling for the past days against the USD. On a good note, Germany’s Bundesbank issued a statement that concludes that German businesses stand to benefit from rising exports. The bank claims that this should offset the now disbanded cash for clunkers program and reflects their lack of concern about the recent strength of the euro. The Eurozone Economic calendar will be light until Wednesday’s PMI reports.

EUR and the G20: Euro-zone policy makers are expected to be at the forefront of the fight for significant financial regulation at this week’s G-20 meeting. The region has already drawn up plans for the EU as a whole, which includes some rather substantial shifts in regulatory practices. According to these plans, a total of three regulatory divisions will be established with broad based powers over financial institutions. Among the new delegated power includes the ability to reverse national regulatory decisions, perform widespread investigations along with the ability to perform stress tests if needed. Their plan is a small peek into the agenda that will be discussed later this week which is why many expect the meeting to result in some of the broadest initiatives since the Great Depression.

Nevertheless, there is still the question of whether international policy makers will be able to coordinate their approaches. Along the same lines, the OECD announced a push for more European banking stress tests. According to the organization, the tests that were performed originally were not transparent enough and should be repeated. On a good note, Germany’s Bundesbank issued a statement that concludes that German businesses stand to benefit from rising exports. The bank claims that this should offset the now disbanded cash for clunkers program and reflects their lack of concern about the recent strength of the euro. The Eurozone Economic calendar will be light until Wednesday’s PMI reports.

JPY - Japanese markets closed Monday. Despite rising stocks in September, the JPY has stayed relatively stable. Along with fellow safe haven currencies the USD and CHF, the Yen stands to gain on any subsequent pullbacks in stocks, and recent experience shows that it can hold its own despite major S&P strength.

The yen is broadly weaker in Monday's markets as Japanese government restructuring takes its toll on confidence. USD/JPY is a particularly strong performer, rising the most since early August. In addition, we have now encountered a six day rally in the dollar, the first time that has happened since February. Despite this fact, USD/JPY has failed to demonstrate any significant gains. On the economic front, there is no new data for today as it is a Japanese holiday. This will be the case for the entire first half of the week. We will have to wait until Wednesday night’s release of the Trade Balance to refuel any economic momentum behind yen price action. Until then, USD/JPY will be driven by US events and any change in risk aversion.

GBP – Hits 5 month low against EUR, BoE quarterly bulletin suggests it expects the GBP to weaken in the long run. No UK reports until Wednesday's BoE release of monthly policy minutes, GBP may have a hard time rallying ahead of the release.

The BoE has not wanted the GBP to rise, and the markets are responding. Last week, Bank of England officials talked about the possibility of lowering the deposit rate, triggering a sharp turn in the GBP/USD. Monday morning, in their Quarterly Bulletin, they attempted to explain why the pound weakened last year. The BoE said that "It is possible that sterling's depreciation may be part of a more prolonged process of rebalancing of the UK economy, generating a fall in the long-run sustainable real exchange rate." The key of course was the last few words of that sentence which basically suggested that the central bank expects the currency to weaken in the long run. They also said their asset purchase program may be contributing to the currency’s weakness as their policy encourages investors to underweight U.K. assets. Economic data has also been mixed with rising unemployment restraining consumer demand but house prices continued to rise. For the seventh trading day in a row, the British pound has lost value against the U.S. dollar, but the more significant weakness was against the euro. The EUR/GBP currency pair fell to a 5 month low, triggering speculation that one euro may soon be equivalent to one British pound, which would be a first.

AUD – Holding near highs, but came in a bit recently over dovish RBA statements. Still expected to be among first to raise rates, with economy in relatively good shape, benefitting from Chinese and other Asian demand for commodities.

NZD – Current account data due The Q2 current account is due and we, along with consensus, predict a material improvement in the external position from 8.5% to 7.4% of GDP, which would be the first time below 8% since 2005. We see AUDNZD at 1.24 in 1m and 3m. While the USD has gained against all commodity currencies recently, the NZD has fallen the least thanks to positive economic data. Reporting GDP today, the result will depend greatly on how much the strong NZD has hurt exports.

CAD – Tracking oil first, stocks and risk appetite second. With oil in consolidation stage, so is the CAD, though slight USD rise a factor too. The key economic report of the week ahead will likely be July retail sales. Strong new motor vehicle sales are likely to boost headline retail sales but we look for sales excluding new car dealers, used and recreational motor vehicle and parts dealers to be moderated by lower prices at gasoline stations. Meanwhile, Finance Minister Flaherty said that the recession may soon be over in a technical sense but labour problems will persist. He also said Canadian credit conditions continue to improve. We target higher USDCAD as there remains the potential for a near-term pull-back from current levels in risk assets. USDCAD rally continuing

CHF – SNB's Hildebrand said the crisis is not yet over and that it is too early to introduce exit strategies, though he said it would be no problem for the SNB to withdraw liquidity in the short-term. Hildebrand cited the inflation outlook as the main tool for rate decisions. With Swiss banks continuing to shrink their balance sheets and the risk of the SNB being forced to tighten earlier than it expects next year, EURCHF remains a sell on rallies despite the central bank's rhetoric against CHF strength.


Thus far a quiet news week without major moves. Wednesday's FOMC meeting and Friday's G20 may provide some news and volatility, though we suspect not. FOMC faces the same fundamental problems, despite improvements in manufacturing. Banks and employment are still far from recovery.

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.

Currency Pair in Play for today from fx360.com.

USD/CAD will be the currency pair in play for the next 24 hours. On tap for Canada will be the release of Retail Sales at 8:30 am ET or 12:30 GMT. The U.S. will report the Richmond Fed Manufacturing and House Price Index at 10:00 am ET or 14:00 GMT.

USD/CAD finds itself returning to the Bollinger band range trading zone as the rally in the CAD has eased. The closest resistance level is at 1.0926, which was the high from September 14th. It is also important to keep in mind that the 20-day moving average stopped further advances today and may serve as additional resistance. To the downside, support is strongest at the September 17th low of 1.0589.



Dollar Shorts Should Look Out

The Dollar: A Strong Buy

Still Waiting for Dollar’s Relief Rally


Dollar Falls as Asia-Pacific Region's Economic Recovery Spurs Yield Demand

Asian Stocks Advance on Brokerage Upgrades; Samsung Electronics, STX Rise

Asia Will Expand Faster Than Expected Through 2010 on Stimulus, ADB Says

Oil Options Hitting Record High as Verleger Predicts 44% Plunge on Supply


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