Wednesday, September 16, 2009

GLOBAL OUTLOOK WEDNESDAY SEPT 16th: USD Funding Carry Trade & Implications


- Stocks: Tuesday: Asia, Europe, US up, Wed 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: CHF: Retail sales, ZEW Sentiment GBP: Claimant Count, Average earnings, Employment, EUR:CPI, CAD: Manufacturing Sales, USD Core CPI, Current Account, TIC Long Term Purchases, Capacity Utilization Rate, Crude Oil Inv

- 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. USDGBP is Trade of the day (See Below)



Despite an early drop, stocks climbed back to log their seventh gain in eight sessions as buyers chased materials stocks and basic commodities.

The major indices started the session in higher ground with help from the August Producer Price Index, which came in with a greater-than-expected 1.7% month-over-month increase, and a stronger-than-expected 0.2% month-over-month increase in core prices. The Empire State Manufacturing Survey for September climbed more than expected to 18.9, which is a new best for 2009, but the advance retail sales report for August was the headliner after it made the sharpest monthly jump in more than three years by climbing a better-than-expected 2.7%. Sales less autos were also better than expected; they increased 1.1%.

Despite the overall positive nature of the data, stocks ran into a flurry of selling pressure midmorning. However, the dip was shallow and short-lived, which led to some short covering that complemented a broader market rebound.

Participants paid little attention to news that July business inventories fell a slightly steeper-than-expected 1.0% and Fed Chairman Bernanke's statement that the recession is very likely over.


Up Tuesday, up Wednesday


Opening up in early morning trade.



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

EUROPE - UP FTSE +0.75 % DAX +0.18% CAC+0.72 %

US- UP DJIA +0.59% S&P +0.31% NASDAQ +0.52%



NIKKEI +0.52 % HS +1.75 % SSEC -1.01% FTSTI +1.28 % AORD +2.27 %


FTSE +0.87 % DAX +0.51% CAC+0.80 %


Strong gains among commodities helped the CRB Commodity Index climb 2.2%, its best single-session percentage advance in more than one month.


In Tuesday NYC trade; Oil gained 3.0%, at $70.93 per barrel. But in Wednesday morning Asia trade fell nearly 1 percent towards $70 on Wednesday, giving up some of the previous day's gains of 3 percent, as a higher-than-expected rise in oil product stocks outweighed news signaling a U.S. economic recovery.

Strong growth in U.S. retail sales, New York State manufacturing activity and U.S. producers' prices failed to offset energy demand concerns in the world's top consumer after data showed a sharp jump in U.S. distillate stocks.

"The market is drawing conclusions from the API report showing a huge jump in product stocks. It is evident from the figures that demand is still lacking," said analyst Michelle Kwek at Informa Global Markets to Reuters "I expect prices to hover between $60 and $70. At this stage, you could day that demand has still not recovered to the extent that would help to sustain prices above $70," Kwek added.

The American Petroleum Institute said in its weekly inventory report after Tuesday's close that crude stocks rose by 631,000 barrels last week, against the forecast in a Reuters poll of analysts for a 2.4-million-barrel drawdown.

The industry group also said distillate stocks, which include heating oil and diesel fuel, jumped by 5.2 million barrels, against a forecast rise of 1.3 million. The U.S. Energy Information Administration (EIA) will release its own data later on Wednesday.

"The oil market currently is focusing more on EIA data than equities or the dollar," Kwek said.


Gold hovered around $1,010 on Wednesday, hanging on to moderate advances made in the previous session after the dollar gave up earlier gains.


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

USD – The U.S. dollar remained under pressure on Wednesday as a broad sell-off gathered steam with investors moving to more risky assets like stocks and commodities amid growing signs of an economic recovery.

Bernanke tight-lipped on exit timing, citing concern over keeping banks liquid, continued job losses. The dollar held in a tight range overnight after yesterday's better-than-expected US economic data [better than expected retail sales and manufacturing data] prompted another leg-up both in equity markets and in EURUSD. Positive comments from Fed Chairman Bernanke also played their part. Clearly, the risk-dollar negative relationship remains firmly intact for now.

Positive news included positive retail data, which in turn will feed a better Q3 GDP, 70% of which is consumer spending. Unclear if the rate of increase can continue, given that even without the cash for clunkers car program, spending was helped by back to school and higher gas price spending. US consumers may again turn thrifty in order to save for Xmas season spending. PPI also rose, though excluding food and energy it only rose 0.2%

EUR- Continuing to benefit from USD weakness based on rising stocks, risk appetite, and increasing use of USD as funding currency in carry trade. ECB members cautioned that growth would be slow, uneven.

JPY - BoJ policy statement due Thursday. Of particular interest on this occasion will be any accompanying commentary relating to the recent strength of the yen, as well as a timetable for the gradual withdrawal of policy stimulus. Likely new Fin. Minister Fuji appears to favor allowing Yen to trade freely (i.e. is against intervention) and allowing the JPY to get stronger

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 – Sterling ‘at Risk’ Hurt by dovish BoE statements – the only currency underperforming the USD

Overall U.K. unemployment, as measured by International Labor Organization standards, climbed to 8 percent in the three months to July, the most since 1996, from 7.8 percent between April and June, a Bloomberg survey showed. The Office for National Statistics releases the data today in London.

Bank of England Governor Mervyn King said yesterday policy makers are considering lowering the rate they pay financial institutions to hold reserves at the central bank to encourage lending.

“Sterling is the currency most at risk among the majors in our view,” analysts led by Hans-Guenter Redeker, London-based global head of currency strategy at BNP Paribas SA, wrote in a research note yesterday. “The news and data from the U.K. have added to the bearish outlook.”

The Bank of England currently pays financial institutions 0.5 percent to hold reserves at the central bank. While the central bank is boosting its reserves through asset purchases under its so-called quantitative-easing program, King said he doesn’t want them to grow too much.

The three main risks to a UK economic recovery were identified as the UK banking system, household and corporate debt, and further weakness from the global economy. King predicted that these would factors cause the UK economic recovery to be slower than usual, and the downturn more protracted. August CPI was reported firmer than expected, at 0.4% m/m (cons. 0.3%, prev. 0%) and 1.6% y/y (cons. 1.4%, prev. 1.8%). King noted that, due to spare capacity in the economy, inflation could remain below 2% in the medium term. He added that the committee was a very long way from having to worry about the possibility of QE operations leading to inflationary pressures.

The August RICS House Price Balance came in much stronger than expected, at 10.7%, the first positive reading since 2007. This suggests that the housing market is showing further signs of stabilization, as a majority of surveyors now report price increases. Unemployment figures are expected to be disappointing. The ILO unemployment may hit 8% and the claimant count rate may rise to 5%. Worsening employment details remain a feature for most G10 economies, despite better activity and output figures

The pound dropped to 88.98 pence per euro after earlier reaching 88.99 pence, the weakest since May 15, from 88.91 pence in New York yesterday.

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

CHF – Final figures ahead of SNB meeting Retail sales - a volatile figure - will be released today for July, and the market is looking for a gain of 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.

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.

Currency Pair in Play for today – FROM FX360.COM

The GBP/USD is our fx trade for today for your consideration. The U.K. releases its unemployment numbers at 8:30GMT or 4:30AM EST. Shortly after, the U.S. will announce the Consumer Price Index and Current Account Balance at 12:30GMT or 8:30AM EST followed by the Treasury International Capital flow report at 13:00GMT or 9:00AM and Industrial Production at 13:15GMT or 9:15AM.

In the daily GBPUSD chart below, note the Note the 1.6200—1.600 trading range. Our proprietary indicators, (including the break below the red 50 day moving average) and fundamentals suggest a near term selling of the pair with a target around 1.6200, stop loss around 1.6680, for a 2:1 reward: risk ratio.

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



A Lot of Caveats to This Recovery Scenario

The Light Volume Continues

Doug Kass Bearish on Equities

The Coming Consequences of Banking Fraud

Overbought Stocks

Why the Sudden Run Up in Natural Gas Prices?

Natural Gas Has Spiked 60% Since Labor Day. Why?

Despite Dedicated ETFs, No Reliable Way to Play Natural Gas


No comments:

Post a Comment