Thursday, September 17, 2009

GLOBAL OUTLOOK THURSDAY SEPT 17th & Implications of USD Drop & What May Stop It


- Stocks: Wednessday: Asia, Europe, US up, Thursday morning Asia, Europe up,

- FX: Generally following stocks. Safety currencies [JPY, USD, CHF in order of safety appeal] generally down 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 JPY::BoJ Press conference, Monetary Policy st., GBP: Retail Sales, CAD: CPI, CHF: Libor Rate, SNB Monetary Policy st., USD: Building permits, unemployment claims, housing starts

- Big Theme: Global equity, commodity, and fx markets are 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 has broad implications, see conclusions below for details on its interaction with other global markets and what could halt the trend.



Continued buying helped the stock market march higher for the third straight session. More impressive was that steady momentum helped stocks close the session at new highs for the year.

The latest leg of the stock market's run came with broad-based support and gave the S&P 500 its best single-session gain in nearly one month.

Strength was most pronounced in the financial sector, which settled 3.4% higher. Multiline insurers (+5.9%), diversified banks (+3.1%), and regional banks (+4.9%) were the sector's standouts. Several widely-held financial companies attempted to win support for their shares by expressing expectations for their business and the financial industry at professional conferences.

Despite the impressive closing prices, stocks actually slipped in the first few minutes of trading. However, buyers quickly stepped in as stocks hit the unchanged mark after retreating from opening levels.

Initial gains were helped along by rallying overseas markets, which helped the Dow Jones World Index, excluding the U.S., advance 2.0%, its best single-session percentage advance in more than one month. The upbeat tone was kept intact by some generally solid economic reports, including an August Consumer Price Index that showed a 0.4% month-over-month increase, which was a tad higher than the expected 0.3% increase. Core consumer prices for August increased 0.1% month-over-month, but that was spot on with the consensus forecast. CPI data for August was much more tame than the August PPI data that were released yesterday. Meanwhile, industrial production for August climbed 0.8%, which exceeded the 0.6% increase that had been widely expected. Capacity utilization for August came in at 69.6%, which was slightly above the 69.0% that was widely expected. The question is, with spending still weak, is this simply a rebuild of depleted inventories or a real reflection of improved demand, and if so, from where?

Overall, with equities up, the dollar down, commodity prices and bond yields rising, every market seems to agree that the U.S. economy will avoid a double dip recession. The VIX, which measures the volatility in the equity market, is also near its 1 year low which suggests that risk appetite is strong. The rallies today are supported by sentiment but the more important question is whether the current valuation is in line with fundamentals. For the time being, it appears to be as the improvements in the housing and manufacturing sector show no signs of waning. Housing starts, building permits and the Philadelphia Fed survey are due for release tomorrow and we expect to see the same strength that we saw in similar reports today.


Up Tuesday, up Wednesday Asian stocks tracked Wall Street higher after U.S. industrial production rose more than expected in August [ID:nN16118540] boosting sentiment towards riskier assets


FTSE rises Wednesday on miners, oils, banks, Thursday futures point to higher opening



ASIA- UP near close NIKKEI +0.15% HS -0.31% SSEC +0.23% FTSTI +0.05% AORD +0.24%

EUROPE - UP FTSE +1.63 % DAX +1.72% CAC+1.64 %

US- UP DJIA +1.12% S&P +1.53% NASDAQ +1.45%




NIKKEI +7.68 % HS +1.71 % SSEC +2.02% FTSTI ++0.30 % AORD +1.32 %

EUROPE: Futures


FTSE +0.87 % DAX +0.73% CAC+0.72 %


CRB Commodity Index advance 1.8%


In Wednesday NYC trade; Oil prices jumped 2.2% to $72.51 per barrel. Oil steadied above $72 in Asia Thursday after rising over 2% Wednesday after data showed US crude inventories fell much more than expected. Natural gas prices settled 12.2% higher at $3.77 per contract. Natural gas prices are now up more than 55% from the 7-year lows that were set earlier this month.

Analysts said although there were no strong fundamentals to lift oil above this year's high of $75 in the short term, a weakening dollar, buoyant stock markets and positive growth data from the United States would stem a big slide in prices.

"Oil inventories are too high and demand is not too great. But we should remember that there is a big loss of confidence in the dollar and that will lend some support to oil,"


In New York Wednesday, Gold prices settled 1.4% higher at $1020.20 per ounce and silver prices climbed 2.5% to a new 12-month high of $17.43 per ounce.

Gold prices steadied on Thursday after rallying the day before to 18-month highs as the dollar slid, with optimism about the

global economy prompting investors to buy riskier and alternative assets.


General: Bias to risk currencies, USD becoming carry trade funding currency, all commodity currencies and USD GBPUSD trade of the day

USD The dollar traded near a one-year low against the euro before reports that may show Europe’s trade surplus is growing and the U.S. housing market is improving. It's at a 13 month low against the AUD and USD.

The broad gauge for the dollar declined after the London interbank offered rate, or Libor, for three-month dollar loans fell to a record low of 0.292 percent yesterday. It was as high as 4.82 percent in October 2008, following the collapse of Lehman Brothers Holdings Inc. the month before.

“Given the fragility of the U.S. economy, the Fed can’t normalize credit and monetary easing policies,” said Mitsuru Saito, chief economist in Tokyo at Tokai Tokyo Securities Co. “The bulk of highly liquid dollar assets will continue to flow into other currencies or commodities, putting downward pressure on the dollar.”

According to the July Treasury International Capital flow report, foreign investors cut their purchases of U.S. dollars significantly last month, adding pressure on the U.S. dollar.

What could reverse the USD slide: Hawkish indications from the Fed if there is enough recovery, especially in jobs and spending, or dovish actions from other central banks, especially the ECB, BoE, or BoJ. Together their currencies paired against the USD comprise almost 60% of all FX trade.

EUR- The euro rose to a four-month high against the pound before a report forecast to show Europe’s trade surplus widened to the most in more than a year, adding to evidence the region’s recession is abating.

The 16-nation euro area’s trade surplus widened to 1.2 billion euros ($1.8 billion) in July, the most since February 2008, from 1 billion euros in June, a Bloomberg survey of economists showed. The European Union’s statistics office will release the report in Luxembourg today. The Dutch central bank said yesterday a “slight improvement” is visible in the global economy.

“Europe is fundamentally on a sound footing,” said Adam Carr, a senior economist in Sydney in a Reuters report. Among the Group- of-Three currencies from the U.S., Germany and Japan, “the euro is my favorite,” he said.

Traders increased bets the European Central Bank will raise its 1 percent benchmark interest rate by the middle of next year. The implied yield on the three-month Euribor futures contract for June 2010 delivery rose to 1.255 percent today from 1.225 percent yesterday.

JPY - The yen weakened after data showed Japanese purchases of foreign bonds reached a four-year high. Gaining against USD due to Fuji's anticipated stronger yen policy (LT trade opportunity, would hurt Japanese profits, Nikkei).

The yen fell for a fourth day versus the euro as Japanese investors bought a net 1.66 trillion yen ($18.2 billion) in overseas bonds and notes in the week ended Sept. 12, the most since June 2005, the Ministry of Finance said today.

“Risk-taking sentiment is improving amid signs of a global recovery,” said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Corp. in Tokyo. “Local investors are probably sending their money overseas into countries such as Brazil, Australia and New Zealand.”

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

GBP – Benefitting least from USD travails, falling against the EUR. Like the US, unemployment remains a growing problem: The Claimant Count rate reached 5.0%, up from last month’s 4.9%. The number of people claiming jobless benefits rose by 24.4k, essentially matching last month’s 25.2K rise. The ILO Unemployment Rate beat estimates for a rise to 8.0% but still managed to hit the worst levels since 1996. Further concern comes into play when examining Average Earnings which rose at the slowest pace on record. The jobless data did not provide any added optimism for the pound and continues to foster a bleak economic outlook.

AUD – Holding near highs, gaining in Asia on the USD despite recent disappointing AUD news, cautious RBA statements, and positive USD news

NZD –holding near highs against USD and other safer currencies

CAD – Moving with risk appetite, commodity prices, weak USD. Threat of intervention if USDCAD drops too low is expected to keep a floor on the USDCAD. Canada reported a 5.5 percent rise in Manufacturing Shipments, the best reading in more than a decade. Inventories sank for the sixth straight month, but New Orders plunged 3.7 percent. On tap for tomorrow will be Canadian Consumer Prices which will surely warrant broad market attention

CHF –Retail sales up 1% better than the expected 0.7% y/y, slightly weaker than the 0.9% seen in June. We expect no change in policy at Thursday's meeting and look for the SNB to begin hikes in H2 2010, CHF hits annual high against USD for 7th straight day, SNB may at least begin verbal intervention if not actual CHF sales

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

On the bright side, weaker dollar should help US exports, earnings, and thus US stocks, especially those tied to commodities and that earn abroad. It will make US businesses, real estate, and other assets cheaper, encouraging foreign investment in these and other hard assets, especially from those holding large USD reserves who don't want to take losses converting these to buy assets in other currencies.

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.

Currency Pair in Play for today GBP/CHF– FROM FX360.COM

GBP/CHF has struggled for the last three days and is firmly supplanted in the Bollinger band sell zone. However, strong support stands close by at a pivotal Fibonacci level. Drawing a Fibonacci retracement from Dec 29th 2008 to June highs yields a 38.2 percent retracement which is just below current prices. We can use the same retracement levels to establish resistance which should come into play at the 23.6 percent resistance of 1.7407. This is also very close to September 4th high. Momentum is firmly mounted for GBP/CHF losses which will require a strong surprise from tomorrow’s events to buck the trend.

GBPUSD Daily Chart as of time of writing (7:30 GMT) 01 sep 16



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